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Lesson 08. Consignment Sales - Lecture Notes

The document discusses consignment arrangements where a consignor sends goods to a consignee to sell without immediate transfer of ownership. The consignor retains ownership and recognizes revenue when goods are sold, while the consignee earns a commission. Under IFRS 15, revenue is recognized when control transfers to the customer. The consignor acts as principal by bearing inventory risk and recognizing gross revenue, while the consignee acts as agent by selling goods on the consignor's behalf. Journal entries are provided for the consignor to record sent goods, sales, commissions payable, and freight costs, and for the consignee to record sales commissions.

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70 views2 pages

Lesson 08. Consignment Sales - Lecture Notes

The document discusses consignment arrangements where a consignor sends goods to a consignee to sell without immediate transfer of ownership. The consignor retains ownership and recognizes revenue when goods are sold, while the consignee earns a commission. Under IFRS 15, revenue is recognized when control transfers to the customer. The consignor acts as principal by bearing inventory risk and recognizing gross revenue, while the consignee acts as agent by selling goods on the consignor's behalf. Journal entries are provided for the consignor to record sent goods, sales, commissions payable, and freight costs, and for the consignee to record sales commissions.

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Hayes Hare
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Consignment Arrangement

Lecture Notes

LO1: Discuss consignment arrangements and its revenue recognition


issues based on IFRS 15
Overview:
● Consignment Arrangement: An agreement where one party (consignor)
sends goods to another party (consignee) without immediate transfer of
ownership. The consignee sells the goods on behalf of the consignor, earning
a commission on sales.
Accounting Treatment
● The consignor retains ownership until the goods are sold. The consignor
records inventory and recognizes revenue upon sale.
● The consignee holds goods, sells on behalf of the consignor, and records
commission as income.
● Under IFRS 15, revenue is recognized when control of the goods is
transferred to the customer (i.e., when sold by the consignee).

LO2: Prepare journal entries related to consignment arrangements

Principal and Agent Relationship


● In a consignment arrangement, the relationship between the consignor (the
party sending the goods) and the consignee (the party receiving the goods
for sale) can be analyzed through the lens of principal and agent concepts.
● The consignor, who sends goods to the consignee, typically acts as the
principal in this arrangement.
● The consignor is responsible for the inventory risk and recognizes revenue on
the gross amount received from the sale of goods.
● The consignee, who sells the goods on behalf of the consignor, generally acts
as an agent.

Pro-Forma Journal Entries by the Consignor:


● Sending of Goods to Consignee
○ No entry as ownership remains with the consignor, but record the cost
directly attributable to sending the goods. Such cost shall form part of
the cost of consigned goods.

● Sale by Consignee
Receivable XXXX
Revenue XXXX

● Recording of Commission
Commission expense
Payable

Practical Application/Example:

BrightTech Electronics (BrightTech), a manufacturer of innovative home appliances,


enters into a consignment arrangement with HomeRetail, a large retail chain.
BrightTech consigns 500 units of a new smart blender to HomeRetail, agreeing that
HomeRetail will earn a 15% commission on each unit sold. The retail price per unit
is set at P200. Additionally, BrightTech incurs P5,000 in freight costs to deliver the
consigned goods to HomeRetail.

Requirements:
1. Describe the roles and responsibilities of BrightTech and HomeRetail in this
consignment arrangement.
2. How does the inclusion of freight costs impact the consignment arrangement
from an accounting perspective?
3. Prepare the journal entries for BrightTech, including the freight costs, when
300 units are sold.
4. Prepare the journal entries for HomeRetail upon the sale of these units.

**Nothing Follows**

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