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Chapter 9
Consignment Sales
PROBLEM 1: TRUE OR FALSE
1. FALSE
2. FALSE
3. TRUE
4. FALSE – Pinewood is primarily liable for the artifact’s
conformance with the customer’s specifications and therefore
Pinewood is a principal. This is irrespective of whether all or
only a portion of the manufacturing process is outsourced.
5. FALSE – Fight Club is not acting as an agent because:
a. Fight Club has inventory risk, i.e., ‘Fight Club bears the loss
for unsold tickets’;
b. Fight Club has the discretion in establishing the selling
price and, therefore, the benefit that Fight Club can receive
from the tickets is not limited;
c. Fight Club’s consideration is not in the form of a
commission; and
d. Fight Club is exposed to credit risk for any tickets sold to
customer on credit.
PROBLEM 2: MULTIPLE CHOICE – THEORY
1. D
2. B
3. A
4. C
5. D
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PROBLEM 3: EXERCISE
Solutions:
Requirement (a):
The publisher’s suggested retail price is computed as follows:
Let X = Book sales at the publisher’s suggested retail price
245,700 net remittance = X – (20%X) – (2%X)
245,700 = .78X
X = 245,700 ÷ .78
X = 315,000
315,000 ÷ 700 books sold = 450 publisher’s suggested retail price per
book
OR
Alternative solution:
2%X + 20%X = 69,300
20%X = 69,300
X = 69,300 ÷ 22%
X = 315,000
315,000 ÷ 700 books sold = 450 publisher’s suggested retail price per
book
The publisher’s profit is computed as follows:
Revenue (450 x 700) 315,000
Cost of goods sold (300 + 22 freight) x 700 (225,400)
Gross profit 89,600
Tax expense (2% x 315,000) (6,300)
Commission expense (20% x 315,000) (63,000)
Profit of publisher 20,300
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Requirement (b):
No. of unsold books 300
Unit cost including freight (300 + 22 freight) 322
Ending inventory 96,600
Requirement (c):
Commission based on publisherʹs suggested retail price
(315,000 x 20%) 63,000
Mark up on publisherʹs suggested retail price
(315,000 x 15%) 47,250
Commission income 110,250
PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL
1. A (500,000 original cost + 20,000 freight) = 520,000
The consigned goods are included in Yahama’s inventory and
not in the consignee’s.
The repair costs are charged as expense.
The advanced commission is treated as receivable in Yahama’s
books and as liability (e.g., unearned commission income) in
the consignee’s books.
2. B
Revenue (960,000 ÷ 80%) 1,200,000
COGS (1) (504,000)
Gross profit 696,000
Commission expense (1.2M x 20%) (240,000)
Profit 456,000
(1) Revenue 1,200,000
Divide by: Sale price per unit 25,000
No. of units sold 48
Multiply by: Unit cost [10K + (25K ÷ 50 units)] 10,500
COGS 504,000
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3. D (40,000 x 40%) + 27,000 = 43,000
4. C
Solution:
Sales revenue (7,700 x 5 units) 38,500
Cost of goods sold (6,000 x 5 units) + (720 x 5/12) (30,300)
Gross profit 8,200
Commission based on sales net of commission (a) (3,500)
Marketing expense based on commission (3,500 x 10%) (350)
Delivery and installation (30 x 5 units) (150)
Profit 4,200
(a) We will use a formula similar to the formula of bonus after bonus:
38,500
Commission based on sales after commission = 38,500 ‐
1+10%
Commission based on sales after commission = 3,500
5. A
Solution:
Sales 38,500
Commission based on sales net of commission (3,500)
Marketing expense based on commission (3,500 x 10%) (350)
Delivery and installation (30 x 5) (150)
Net remittance to consignor 34,500
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PROBLEM 5: CLASSROOM ACTIVITY
Solution:
Allegretto is a principal because it controls the tickets before they
are resold to the customer. This is evidenced by the following:
a. Allegretto is primarily responsible for fulfilling the contract,
which is providing the right to fly; although, not the flight
itself, which will be provided by the airline;
b. Allegretto has inventory risk because it bears the loss for
unsold tickets;
c. Allegretto has the discretion in establishing the resale price of
the tickets; and
d. Allegretto’s consideration is not in the form of a commission,
but rather the resale price of the ticket.
Allegretto recognizes revenue at the gross amount of the
resale price of the tickets as the tickets are sold to the customers.
PROBLEM 6: FOR CLASSROOM DISCUSSION
1. Solution:
Pizzicato is an agent because it does not control the good or
service before it is provided to the customer. Pizzicato’s
performance obligation is solely to arrange the provision of good
or service by the restaurants. This is evidenced by the following:
a. The restaurants, and not Pizzicato, are the ones primarily
responsible in providing the meals.
b. Pizzicato does not have inventory risk because it does not
purchase the vouchers before they are sold to the customers.
c. Pizzicato does not have the full discretion in setting the prices
of the vouchers because the prices are jointly determined with
the restaurants.
d. Pizzicato’s consideration is in the form of a commission.
e. Pizzicato is not exposed to credit risk.
Pizzicato recognizes revenue in the amount of the
commission to which it is entitled upon the sale of each voucher.
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2. Solution:
Staccato is a principal because it controls the equipment before it
is provided to the customer. This is evidenced by the following:
a. Staccato is primarily responsible for fulfilling the contract
because, although the manufacturing is subcontracted,
Staccato is ultimately responsible for ensuring that the
equipment meets the specifications for which the customer has
contracted.
b. Staccato has inventory risk because of its responsibility for
corrections to the equipment resulting from errors in
specifications, even though the supplier has inventory risk
during production and before shipment.
c. Staccato has discretion in establishing the selling price with
the customer.
d. Staccato’s consideration is not in the form of a commission.
e. Staccato has credit risk for the amount receivable from the
customer.
When the performance obligation is satisfied, Staccato
recognizes revenue at the gross amount of the selling price
negotiated with the customer.
