Excel Professional Services Inc.

Management Firm of Professional Review and Training Center (PRTC)

Online • Manila • Cavite • Laguna • Cebu • Cagayan De Oro • Davao
Since 1977

Advanced Financial Accounting

and Reporting (AFAR) CPA Review DE LEON/DE LEON/ALENTON
AFAR.3605 CONSIGNMENT SALES MAY 2024

LECTURE NOTES

CONSIGNMENT SALES
The CONSIGNMENT PROFIT of Gloria B. on this consignee
A consignment sales is an arrangement whereby the owner for the month is computed, as follows:
of the goods transfers possession of the same to a third Sales, per account sales P168,000
party, the agent, so the latter may sell it to customers. In Less Cost of sales [( 120 suits x
accounting for consignment sales, the owner is called P1,000) + (10 dozens x P300)]
consignor, and the seller, consignee. x 7/10 86,100
Gross profit P 81,900
There will be no transfer of title over the goods upon the Expenses: Sales Commissions P 25,200
shipment from the consignor to the consignee; it will occur Delivery expenses 2,000 27,200
when the goods are sold by the consignee to the ultimate Net profit P 54,700
buyer. The consignor owns the goods until sold even Please note that the shipping cost of the consigned goods,
though they are in the meantime held by the consignee P3,000, was deferred as additional cost of the consigned
and cared for as if they were its own. goods and then allocated to cost of units sold, P2,100 and
to the cost of the inventory of unsold units, P900.
Two types of costs are incurred in a consignment
arrangement. The first type pertains to costs incurred upon The inventory of consigned goods held by the consignee to
the transfer of goods from the consignor to the consignee; be reported by the consignor will be reported as follows:
at their desired condition, to the agreed destination. Cost of the suits not sold ( 36 suits x P1,000) P 36,000
These costs are deferred and allocated to the cost of sales Allocated deferred shipping cost (P3,000 x 3/10) 900
and to the ending inventory of the consigned goods. One Total P 36,900
deferral method is to capitalize these items as additional
cost of the consigned goods to achieve simultaneous If the shipping cost of consigned goods of P3,000 (10
allocation. Some examples are: (a) shipping, freight, and dozens x P300) is paid by the consignee (rather than by
handling costs; (b) insurance premium on consigned the consignor) upon receipt thereof, the cash remittance
goods; and (c) assembly or reconditioning costs on will only be P137,800, P3,000 lesser than the initial
consigned goods. amount of P140,800 under the original account sales.

The second type pertains to costs incurred by the But the net profit for the period and the ending inventory
consignee in selling the goods to individual customers and of consigned goods to be reported by the consignor will be
includes commissions earned for selling the goods. These the same, because the shipping cost of P3,000 is to be
costs are expensed in full immediately by the consignor. deferred regardless of which party paid for it.
Some examples are (a) advertising, delivery, and
installation of sold units; (b) insurance premium while in METHODS OF ACCOUNTING FOR THE CONSIGNMENT
transit to the buyer; and (c) reconditioning or repair of PROFIT BY THE CONSIGNOR
already delivered units to customers. In accounting for consignment sales, the consignor may
select an accounting process that will measure
To understand the mechanics of the arrangement, the consignment profits in one of two ways: (a) profits merged
following is a simple example. together for all consignees or (b) profits determined for
each consignee. The accounting plan and the chart of
Gloria Baysa Corporation consigned 10 dozens of fine accounts will be based on the alternative systems adopted.
men’s suit at a cost of P1,000 a suit to Concepcion Lupisan
Enterprises. Shipping costs of P300 per dozen were Consignment Profits Not Determined Separately For Each
incurred by Gloria B. Concepcion L. is to earn a 15% Consignee.
commission on sales. A month later, Concepcion L.
reported sales of 7 dozens of the suit at P2,000 a suit and From the standpoint of the consignor, its consignment
paid expenses of P2,000 for the delivery of the sold units sales, cost of consignment sales, advertising expenses,
to various customers. and commission expenses, etc. are a combination of like
items from all consignees during the period and comprise
An ACCOUNT SALES may be prepared by Concepcion L. to the total for each of these items in the income statement.
support her remittance to Gloria B., as follows: On the other hand, the inventory of consigned
Sales ( 84 men’s suit at merchandise still held by all consignees at the end of the
P2,000) P 168,000 period, combined together, will be the total inventory of
Less: Sales Commissions consigned merchandise to be shown on the balance sheet
(P168,000 x 15%) P 25,200 of the consignor.
Delivery Expenses 2,000 27,200
Remittance enclosed P 140,800

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Using the previous example, the journal entries to account for the consignment transactions in the books of the consignor
and of the consignee, if profits will not be determined separately, follows:

Books of consignor Books of Consignee

Invtry on Consignment P120,000 Memo entry
Merchandise Invtry P120,000
Invtry on Consignment 3,000 No entry
Cash 3,000
No entry Consignor receivable P 2,000
Cash P 2,000
No entry Cash 168,000
Consignor payable 168,000
Cash 140,800 Consignor payable 168,000
Delivery expense 2,000 Consignor receivable 2,000
Commissions expense 25,200 Commissions revenue 25,200
Consignment sales 168,000 Cash 140,800
Cost of goods sold 86,100 Memo entry re: the number of consigned units still held.
Invtry on Consignment 86,100

Consignment Profits Determined Separately For Each consignor; costs and expenses paid by the consignee, and
Consignee. consignment profit. It will be credited for consignment
sales and for the cost of consigned goods returned to the
Under this approach, a Consignment-Out account is set up consignor.
in the books of the consignor for every consignee and a
Consignment-In account is set up in the consignee’s The Consignment-In account will be debited for the costs
records to account for the consignment transactions in and expenses incurred by the consignee and for the
their respective records. commissions it earns from the arrangement. It will be
credited for the amount of consignment sales. Receipts of
The Consignment-Out account will be debited for the cost consigned goods from the consignor, as well as returns, if
of the goods consigned; costs and expenses paid by the any, to the consignor are by memo entries only

Continuing with the previous example, the journal entries to be recorded if the consignment profit will be determined
separately for each consignee, follows:

BOOKS OF CONSIGNOR BOOKS OF CONSIGNEE

Consignment Out P120,000 Memo entry
Mdse inventory P120,000
Consignment out 3,000 No entry
Cash 3,000
No entry Consignment In P 2,000
Cash P 2,000
No entry Cash 168,000
Consignment In 168,000
Cash 140,800 Consignment In 168,000
Consignment Out 27,200 Consignment In 2,000
Consignment Out 168,000 Commissions revenue 25,200
Cash 140,800
Consignment Out 54,700 No entry
Consignment profit 54,700

It will be noted from the above that the balance of the Cost of sales P 86,100
Consignment-Out account after the entry for the Delivery expenses 2,000
recognized consignment profit is P36,900, (P120,000 + Commissions expenses 25,200
P3,000 + P27,200 – P168,000 + P54,700) which is the Consignment profit 54,700
cost of the ending consigned inventory still held by the Consignment sales P168,000
consignee. On the other hand, the Consignment-In
account is closed because it has remitted all the sales Inventory on consignment P 36,900
proceeds to the consignor, net of reimbursable expenses Consignment-Out P 36,900
and the commissions it earned. The cost of the remaining
unsold units is not formally recognized in the consignee’s A reversing entry must be recorded at the beginning of the
records because it does not own the goods. next period to restore the Consignment-Out account at its
original balance.
An adjusting entry to reclassify the Consignment-Out Consignment-Out P 36,900
account must be recorded in order that items and accounts Inventory on consignment P 36,900
embedded in it will be recognized in the accounting records
and in the financial statements, as follows:

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ILLUSTRATIVE EXERCISES

Case 1. CONSIGNMENT –OUT of MYLENE, Inc.

STACEY Manufacturing Company consigned 10 units of 42” Date Particulars Debits Credits Balance
television sets to ALEJANDRO Appliances, Inc. The cost to July 4 Shipped 80 units P11,520 P11,520dr
STACEY per set is P25,000 and ALEJANDRO was instructed 4 Freight costs 936 12,456 dr
to sell each at P35,000 for a 10% sales commission to 31 Charges by consignee:
Assembly costs 360 12,816 dr
ALEJANDRO. Freight charges paid by STACEY on the
Commissions on sale 2,625 15,441 dr
delivery of the consignment to ALEJANDRO was P5,000.
31 Selling price of 50units P13,125 2,316 dr
ALEJANDRO was able to sell 8 television sets and incurred
delivery and installation costs of P3,000 for the delivered
EDMOND COMPANY debited the Consignment-Out account
units.
for all costs relating to the consignment and credited the
Consignment-Out account for the selling price of units sold
Required:
by the consignee.
1. Prepare an account sales.
2. Compute the net profit of the consignor from the
Required:
consignee sales.
1. Prepare the journal entry to record the consignment
3. Compute the cost of the unsold TV sets still held by the
profit in the books of the consignor.
consignee.
2. Prove the adjusted balance of the Consignment-Out
4. Prepare journal entries in the books of the
account, after the recognition of profit, is equal with
consignment parties assuming profits are not
the cost of unsold units still in held by the consignee.
determined separately.
3. Prepare a reclassification entry for the Consignment-
Out account for financial statement purposes of the
Case 2.
consignor.
On August 1, 2023, KURTSY Company consigned 20 units
of gas oven to Maxinne Stores. The cost of each unit is
P12,000 and Maxinne was instructed to sell each for
Case 4.
P20,000 for a 5% commission. Shipping costs of P4,500
OHDA Products, Inc., a Manila-based company, shipped 15
was paid by Maxinne upon receipt of the consigned goods
units of its top-of-line hand phones, Rainbow Brand, to
from KURTSY. Additional shipping cost by Maxinne on the
NORINA Communications in Davao. The agreement is a
sale of 12 units was P5,000. Full cash remittance was
consignment arrangement that entitles NORINA to an 8%
made by Maxinne, net of commissions and reimbursable
commission on units sold plus reimbursements of
expenses, on December 31, 2023.
authorized expenses. The hand phones cost P5,000 each
and the unit selling price is P7,000.
Required:
1. Prepare an account sales.
OHDA paid transportation costs of P700 to deliver the
2. Compute the consignor’s profit from consignee sales
phones to Davao from Manila. NORINA paid reimbursable
for the month.
advertising expense of P1,500 for the phones held before
3. How much will be the debit balance of the
they were actually sold
Consignment-Out account after adjustments for the
net profit assuming it is kept separate for each
NORINA sold 12 units for P84,000; it prepared a
consignee.
consignment report called “Account Sales” and remitted
4. Discuss briefly the accounting difference, if any,
the net amount due the consignor.
between the reimbursable shipping costs of P4,500 and
P5,000 paid by Maxinne.
Required:
5. Prepare journal entries in the accounting records of the
1. Prepare an “Account Sales” for the above information.
participants for the above information.
2. Compute for the net profit from the above
transactions.
3. Prepare journal entries, consignor’s profits not
Case 3.
determined separately.
The Consignment-Out ledger account for the month of July
4. Prepare another set of journal entries if consignor’s
2023 in the accounting records of EDMOND COMPANY
profits are determined for each consignee.
follows:

MULTIPLE CHOICE

LASSEDE COMPANY consigned 400 dresses to Anne 2. The journal entry to be recorded by Anne for the
Fashions at a suggested retail price of P300 each. remittance to Lassede, assuming profits are
LASSEDE paid freight charges of P1,200 on the shipment separately determined and Anne uses the
on consignment. Anne paid delivery charges of P1,260 for Consignment-In, will NOT include
units sold, subject to subsequent settlement. LASSEDE and a. a debit to Consignment-In of P64,500
Anne agreed that any sales in excess of the suggested b. a credit to commissions revenue of P14,964
retail price will accrue to the latter. Anne submitted an c. a credit to cash of P63,240
account sales on the sale of 215 dresses, 40% of which d. a credit to Consignment-In of P1,260
was sold at P348 each and the rest at P384 each, All these
sales were paid in cash. LASSEDE’s cost is P225 each 3. How much is the commission earned by Anne from
dress, before any deferred costs are taken into account. sales of the consigned goods?
a. 7,942 c. P14,964
1. How much should Anne remit to LASSEDE for the
b. 29,880 d. P49,536
aforementioned sales to customer?
a. P 63,240 c. P 64,500
b. P 78,204 d. P 79,464
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4. The cost of consigned goods to Lassede for the units

sold by Anne to customers was 8. How much was the consignment profit to Fashionable
a. P 49,020 c. P 52,260 Enterprises?
b. P 60,392 d. P 63,902 a. P 55, 590 c. P 18,430
b. P 58,590 d. P 18,340
5. The cost of the unsold 185 dresses still held by Anne
is shown at what amount in Anne’s Consignment-In 9. How much is the Inventory of consigned goods after
account? the above mentioned sales?
a. P41,625 c. P 42,180 a. P 67, 445 c. P 67,545
b. P49,020 d. P 0 b. P 67,544 d. P 65,744

6. The balance of the Consignment-Out account in the Aircon, Inc. consigned 10 one-horse power air conditioner
books of Lassede after adjustment for recognized units to Argy Trading and paid P2,000 freight out. Gross
profit will be margin is 12.5% of sales. The consignee is allowed a
a. P0 c. P 42,180 commission of 5% on sales. Argy Trading submitted an
b. P49,020 d. P 41,625 account sales on December 31, 2024 as follows:

Fashionable Enterprises consigned 15 dozens of fine men’s Sales P 72,000

suits with a cost of P800 a suit to Wonder Treats Company. Less: Advances to consignor P 10,000
Fashionable incurred freight cost of P35 per dozen. As Selling expenses 800
required by the agreement, Wonder Treats reported sales Delivery and 1,200
of 8 dozens at P1,200 a suit and reimbursable expenses of installation cost
P2,500. Wonder Treats remitted the proceeds to Commission 3,600 15,600
Fashionable, net of the agreed 15% commissions on sale. Net remittance P 56,400
7. How much cash was remitted by Wonder Treats to
10. How much is the net profit or loss of Aircon, Inc. in the
Fashionable Enterprises?
consignment?
a. P139, 800 c. P 95,420
a. P 1,400 profit c. P 2,200 profit
b. P142,500 d. P142,800
b. P 8,800 loss d. P 720 loss

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