Consignor makes a profit on the sale and carries merchandise as inventory.Sources: Dayag, A. (2018, 2021) Advanced Financial Accounting, Millennium Books, Inc.
BSA 3101 Accounting for Special TransactionsConsignment SalesIllustrationHerbalife Supplier sends P50,000 (100 sachets of herbal foods) worth of goods on consignment to Conrado Enterprises. Following are the costs incurred:•Shipping costs of P500 are paid by Herbalife.•Reimbursable finishing costs of P2,000 are paid by Conrado.•Conrado advances P2,800.•On December 31, 20x4, one-half of the goods on consignment are sold for P40,000 cash•A 10% commission on sales is earned by Conrado according to the terms of the consignment.The journal entries shown below would be made on the consignor's and consignee’s books (assume the use ofperpetual inventory)TransactionEntries on Consignor’s Books(Herbalife Supplier)Entries on Consignee’s Books(Conrado Enterprises)1. Shipment on goods onconsignmentInventory on Consignment Finished Goods Inventory50,00050,000Memorandum entry only2. Payment of expenses by consignorInventory on consignmentCash500500No entry3. Payment of expenses by consigneeInventory on consignmentConsignee payable2,0002,000Consignor ReceivableCash2,0002,0004. Advances by ConsignorCashAdvances from consignee2,8002,800Advances to consignorCash2,8002,8005. Sale of merchandiseNo entryCashConsignor payable40,00040,0006. Notification of sale to consignor and payment of cash due.Commission: 10%*P40,000Commission expenseAdvances from consigneeCashConsignee payableConsignment sales revenue4,0002,80031,2002,00040,000Consignor payableCommission revenueConsignor receivableCashAdvances to consignor40,0004,0002,00031,2002,8007. To record cost of goods sold and related costs (50,000+500+2,000)*1/2=P26,250Cost of goods soldInventory on consignment26,25026,250Determination of Net Income, Deferred Consignment Costs and Goods ReturnedIn order to determine the net income profit from sales in this period and the cost to be deferred, it is necessary to allocate the total cost identified with the goods on consignment between the units sold in this period (to be matched against consignment sales in this period) and the units still on and at the end of the period (to be reported as inventory on the consignors balance sheet.When allocation is made, costs are classified as either inventoriable or non-inventoriable. Inventoriable costs (product costs) are those considered necessary to acquire the product and get it to the location of sale and prepare it for sale. Inventoriable costs are said to attach to the inventory and become a part of the total cost, ortotal valuation of the inventory. The cost of the goods, the freight-out (shipment to consignee) or freight expenditures were considered costs necessary to get the goods to a location for sale and in a salable condition. Such costs are deducted from (matched against) consignment revenues in the accounting period in which the individual units are sold.Other costs incurred by the consignee and consignor do not add to the utility of the goods and are considered non-inventoriable or period costs. Period costs are expensed in the accounting period in which the expense is incurred. Costs such as commissions earned by the consignee and the cost of repairing two of the units sold