PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY (PRIA)

ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

4.0 Revenue Recognition

4.4 Consignment Sales – IFRS 15
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REVIEW OF LEARNING OBJECTIVES

1. Goods may be transferred by their owner to another party who is to act as sales agent, with
legal title to the goods retained by the owner until their sale. Such a transfer is known as a
consignment. The party who owns the goods in such a relationship is known as the
consignor; the party who undertakes to sell the goods is known as the consignee, factor, or
commission merchant.

2. From a legal point of view the transfer of goods represents a bailment, with the consignee
possessing the goods for the purpose of sale as specified in the agreement between the
consignor and the consignee. The consignor holds the consignee accountable for goods
transferred to the latter’s care until the goods are sold to a third party. Upon such sale, the
consignor recognizes a transfer of title to the goods and also revenue from the sale. The
consignee, on the other hand, cannot regard consigned goods as his or her property; nor is
there any liability to the consignor other than an accountability for consigned goods. The
relationship between the consignor and the consignee is one of principal and agent, and the
law of agency governs the determination of the rights and the obligation of the two parties.

3. Consignments may have advantages for many products, including household appliances,
books, magazines, newspapers, and novelty items.

4. The consignor may prefer the consignment of goods to dealers for the following reasons:

a. The consignment may be the only way in which a wider marketing area can be secured by
a producer, manufacturer, or distributor, particularly when (1) the goods are just being
introduced and the demand for the product is unknown or uncertain; (2) sales in the past
have proven unprofitable to the dealer; (3) the goods are costly, requiring a large
investment on the part of the dealer if purchased; and (4) price fluctuation of product
perishability is such that the dealer will agree to sell goods only if the risk of loss is borne
by another. The dealer, incurring neither the liability nor the risk involved with purchase
of the goods, is generally willing to accept goods on a consignment basis.

b. Selling specialists may be obtained by the consignor, particularly for the sale of grain,
livestock, and produce. The compensation for such services is frequently a commission,
which may be a percentage of sales price or a fixed amount for each unit of goods sold.

c. The retail selling price of consigned goods can be controlled by the consignor who still
owns the goods. This may be difficult or impossible when the goods are actually sold to
the dealer.

5. The consignee may favor the acquisition of goods by consignment for the following reasons:

a. The consignee is protected from the risk of failing to move the product or selling it at a
loss. This factor may be particularly important in the case of new products or products
that are being sold in a certain area for the first time.

b. The risks of physical deterioration and price fluctuation are avoided. These are important
considerations where risks are particularly prevalent, as in the trade of livestock, fresh
produce, and other perishable products.

c. Working capital requirements are reduced because the cost of the consignment inventory
is carried by the consignor.

Multiple Choice Problems

1. Ace Manufacturing Company ships merchandise costing P90,000 on consignment to Best

Store. Ace pays P9,375 of freight costs and Best Store pays P5,625 for local advertising
costs that are reimbursable from Ace. By the end of the period, two-thirds of the
consigned merchandise has been sold for P100,000 cash. Best Store notifies Ace of the
sales, retains a 10% commission, and remits the cash due Ace. The amount remitted by
Best Store to Ace was
a. P56,250 b. P84,375 c. P100,000 d. P112,500

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 PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY (PRIA)
ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

2. Refer to No. 1. The net income on the consignment was

a. P18,125 b. P33,125 c. P56,250 d. P75,000

3. Refer to No. 1. The cost of ending inventory is

a. P18,750 b. P28,125 c. P33,125 d. P37,500

4. In 2013, Full Shop transferred goods to a retailer on consignment. The goods cost
P450,000 and normally are sold at a 50% markup. Full Shop paid P5,000 for the cost of
shipment while the retailer paid P3,800 for advertising and P2,800 for the cost of freight
out. The parties agreed that Full Shop would reimburse the cost of advertising and freight
paid by the retailer. In 2013, the retailer at the normal markup sold 60% of the
merchandise, and the balance of the merchandise was returned to Full Shop. The retailer
withheld a 15% commission from payment plus the amount reimbursable by the
consignor. The amount remitted by the retailer to the consignor is
a. P337,650 b. P340,450 c. P344,250 d. P405,000

5. Refer to No. 4. The cost of inventory returned to Full Shop

a. P180,000 b. P182,000 c. P183,680 d. P184,000

6. Refer to No. 4. The net income earned by the consignor on the shipment is
a. P61,530 b. P62,650 c. P64,650 d. P405,000

7. Cone Industries sells merchandise on a consignment basis to dealers. Shipping costs are
chargeable to Cone, while advertising costs are reimbursable from the consignor. The
selling price of the merchandise averages 40% above cost of merchandise exclusive of
freight. The dealer is paid a 10% commission on the sales price for all sales made. All
dealer sales are made on cash basis. The following consignment sales activities occurrd
during the current year: Units shipped 100; Unit cost P10,000; Freight cost paid by Cone
P75,000; Freight cost P25,000 and advertising cost P50,000 was paid by consignee. At
the end of the month , the consignor receives a notification from the consignee that 80
units were sold and that the amount due consignor is enclosed. The amount remitted
by the consignee is
a. P933,000 b. P958,000 c. P1,008,000 d. P1,112,000

8. Refer to No. 6. The cost of inventory in the hands of the consignee is

a. P200,000 b. P215,000 c. P235,000 d. P245,000

9. Refer to No. 6. The net income to be reported by the consignor as a result of the above
is
a. P58,000 b. P70,000 c. P73,000 d. P75,000

END.

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