AFAR 2814 Consignment Sales & Franchise Accounting PDF

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AFAR Construction Contracts, Consignment, and Franchise Accounting with notes and practical exercises, solutions, guides and many more....

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ADVANCED FINANCIAL ACCOUNTING AFAR.2814- CONSIGNMENT SALES

DE LEON/DE LEON/DE LEON BATCH: MAY 2020

LECTURE NOTES CONSIGNMENT SALES A consignment sales is an arrangement whereby the owner of the goods transfers possession of the same to a third party, the agent, so the latter may sell it to customers. In accounting for consignment sales, the owner is called consignor, and the seller, consignee. There will be no transfer of title over the goods upon the shipment from the consignor to the consignee; it will occur when the goods are sold by the consignee to the ultimate buyer. The consignor owns the goods until sold even though they are in the meantime held by the consignee and cared for as if they were its own. Two types of costs are incurred in a consignment arrangement. The first type pertains to costs incurred upon the transfer of goods from the consignor to the consignee; at their desired condition, to the agreed destination. These costs are deferred and allocated to the cost of sales and to the ending inventory of the consigned goods. One deferral method is to capitalize these items as additional cost of the consigned goods to achieve simultaneous allocation. Some examples are: (a) shipping, freight, and handling costs; (b) insurance premium on consigned goods; and (c) assembly or reconditioning costs on consigned goods. The second type pertains to costs incurred by the consignee in selling the goods to individual customers and includes commissions earned for selling the goods. These costs are expensed in full immediately by the consignor. Some examples are (a) advertising, delivery, and installation of sold units; (b) insurance premium while in transit to the buyer; and (c) reconditioning or repair of already delivered units to customers. To understand the mechanics of the arrangement, the following is a simple example. Gloria Baysa Corporation consigned 10 dozens of fine men’s suit at a cost of P1,000 a suit to Concepcion Lupisan Enterprises. Shipping costs of P300 per dozen were incurred by Gloria B. Concepcion L. is to earn a 15% commission on sales. A month later, Concepcion L. reported sales of 7 dozens of the suit at P2,000 a suit and paid expenses of P2,000 for the delivery of the sold units to various customers. An ACCOUNT SALES may be prepared by Concepcion L. to support her remittance to Gloria B., as follows: Sales ( 84 men’s suit at P2,000) P 168,000 Less: Sales Commissions (P168,000 x 15%) P 25,200 Delivery Expenses 2,000 27,200 Remittance enclosed P 140,800

The CONSIGNMENT PROFIT of Gloria B. on this consignee for the month is computed, as follows: Sales, per account sales P168,000 Less Cost of sales [( 120 suits x P1,000) + (10 dozens x P300)] x 7/10 86,100 Gross profit P 81,900 Expenses: Sales Commissions P 25,200 Delivery expenses 2,000 27,200 Net profit P 54,700 Please note that the shipping cost of the consigned goods, P3,000, was deferred as additional cost of the consigned goods and then allocated to cost of units sold, P2,100 and to the cost of the inventory of unsold units, P900. The inventory of consigned goods held by the consignee to be reported by the consignor will be reported as follows: Cost of the suits not sold ( 36 suits x P1,000) P 36,000 Allocated deferred shipping cost (P3,000 x 3/10) 900 Total P 36,900 If the shipping cost of consigned goods of P3,000 (10 dozens x P300) is paid by the consignee (rather than by the consignor) upon receipt thereof, the cash remittance will only be P137,800, P3,000 lesser than the initial amount of P140,800 under the original account sales. But the net profit for the period and the ending inventory of consigned goods to be reported by the consignor will be the same, because the shipping cost of P3,000 is to be deferred regardless of which party paid for it. METHODS OF ACCOUNTING FOR THE CONSIGNMENT PROFIT BY THE CONSIGNOR In accounting for consignment sales, the consignor may select an accounting process that will measure consignment profits in one of two ways: (a) profits merged together for all consignees or (b) profits determined for each consignee. The accounting plan and the chart of accounts will be based on the alternative systems adopted. Consignment Profits Not Determined Separately For Each Consignee. From the standpoint of the consignor, its consignment sales, cost of consignment sales, advertising expenses, and commission expenses, etc. are a combination of like items from all consignees during the period and comprise the total for each of these items in the income statement. On the other hand, the inventory of consigned merchandise still held by all consignees at the end of the period, combined together, will be t he total inventory of consigned merchandise to be shown on the balance sheet of the consignor.

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AFAR.2814

EXCEL PROFESSIONAL SERVICES, INC 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 Invtry on Consignment P120,000 Merchandise Invtry Invtry on Consignment 3,000 Cash No entry

Books of Consignee Memo entry P120,000 No entry 3,000

No entry Cash Delivery expense Commissions expense Consignment sales Cost of goods sold Invtry on Consignment

140,800 2,000 25,200 168,000 86,100

Consignor receivable P 2,000 Cash P 2,000 Cash 168,000 Consignor payable 168,000 Consignor payable 168,000 Consignor receivable 2,000 Commissions revenue 25,200 Cash 140,800 Memo entry re: the number of consigned units still held.

86,100

Consignment Profits Determined Separately For Each Consignee. Under this approach, a Consignment-Out account is set up in the books of the consignor for every consignee and a Consignment-In account is set up in the consignee’s records to account for the consignment transactions in their respective records. The Consignment-Out account will be debited for the cost of the goods consigned; costs and expenses paid by the

consignor; costs and expenses paid by the consignee, and consignment profit. It will be credited for consignment sales and for the cost of co nsigned goods returned to the consignor. The Consignment-In account will be debited for the costs and expenses incurred by the consignee and for the commissions it earns from the arrangement. It will be credited for the amount of consignment sales. Recei pts of consigned goods from the consignor, as well as returns, if 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 Consignment Out P120,000 Mdse inventory Consignment out 3,000 Cash No entry

BOOKS OF CONSIGNEE Memo entry P120,000 No entry 3,000

No entry Cash Consignment Out Consignment Out Consignment Out Consignment profit

140,800 27,200 168,000 54,700

Consignment In Cash Cash Consignment In Consignment In Consignment In Commissions revenue Cash No entry

P

2,000 P

2,000

168,000 168,000 168,000 2,000 25,200 140,800

54,700

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

Cost of sales Delivery expenses Commissions expenses Consignment profit Consignment sales

P 86,100 2,000 25,200 54,700

Inventory on consignment Consignment-Out

P 36,900

P168,000

P 36,900

A reversing entry must be recorded at the beginning of the next period to restore the Consignment-Out account at its original balance. Consignment-Out P 36,900 Inventory on consignment P 36,900

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