5.3.2: Consignment Sales

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Sometimes a retailer may not want to take the risk of purchasing a product for resale. The retailer may not want to tie up working capital or may think the product is too speculative or risky. In these cases, a consignment arrangement may be appropriate. Under this type of arrangement, the manufacturer of the product (the consignor) will ship the goods to the retailer (the consignee), but the manufacturer will retain legal title to the product. The consignee agrees to take care of the product and make efforts to the sell the product, but no guarantee of performance is made. As well, the agreement will likely require the return of the goods to the consignor after a specified period, if the goods are not sold. Thus, the performance obligation has not been satisfied when the goods are transferred to the consignee, and the consignor cannot recognize revenue at this point. The goods will, thus, remain on the consignor's books as inventory until the consignee sells them. When the consignee actually sells the product, an obligation is now created to reimburse the consignor the amount of the sales proceeds, less any commissions and expenses that are agreed to in the contract for the consignment arrangement. At the time of sale, the consignor can recognize the revenue from the product, and the consignee can recognize the commission revenue.

Assume the following facts: Dali Printmaking Inc. produces fine-art posters. Dali ships 3,000 posters to Magritte Merchandising Ltd. on a consignment basis. The total cost of the posters is $12,000, and Dali pays $550 in shipping costs. Magritte pays $1,200 for advertising costs that will be reimbursed by Dali. During the year, Magritte sells one-half of the posters for $23,000. Magritte informs Dali of this and pays the amount owing. Magritte's commission is 15 percent of the sales price. The accounting for this type of transaction looks like this:

Dali Printmaking Inc. (consignor)

Magritte Merchandising Ltd. (consignee)

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