Consignment arrangement

  • Creator
    Topic
  • #1686797
    SchruteBeet
    Participant

    I am going through consignment arrangements and from what I understand under F1 in Becker. consignment arrangements are typically when an entity controls a product and the dealer/distributor has no control. The entity can sell it to the end customer on the dealer’s request but has the right to ask for return. Under this concept, it seems like the entity is in possession of said goods and should include it in their inventory. But in F3, in the inventory chapter, it says the consignor possesses title to the goods and has risk of loss and therefore should include it in their inventory. The consignee is only responsible for shipping the goods to end customer. I apologize if I am confusing anyone but what am I missing here?

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  • #1686820
    jenpen
    Participant

    Let's see if maybe I can break it down and at least figure out where your confusion lies.

    So Company A has inventory to sell. A sends the goods to B to be displayed. B can sell the goods for A and will typically receive a commission for being the dealer. Company B does not include the goods in their inventory as they never have a right to or risk involved with the inventory. Company A will show the goods in their inventory and retains all rights to the goods until they are sold, at which time title will pass to the buyer.

    Basically, the consignee is just a holder of the goods and is helping sell them for a price, but they have no stake in the inventory.

    Does this help, or is the confusion somewhere else? I was having trouble following what the problem was in your post.

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    #1686830
    SchruteBeet
    Participant

    @Jennifer, thanks for the explanation! I understood the part you explained and that aligns well with Becker's explanation of consigned goods in F3 (inventory). However what is confusing me is that, under F1, it talks about the indicators of a consignment: (1) entity controls product (2) dealer/distributor has no unconditional obligation to pay (3) entity can require return or transfer to another party. In this case, revenue will be recognized by the entity only when goods are sold to an end customer or dealer/distributor takes control of products. If I look at this definition of a consignment arrangement, I am prompted to think that the entity will include the inventory on its balance sheet and not the dealer/distributor. So essentially what I am wondering is what exactly entails a consignment: (1) when company A has title to goods and leaves its possession with company B and asks them to sell upon a customer's request (company B has an obligation to sell goods to company A's customers) or (2) company B has title and possession of goods and sells it to customer A's customers when asked to (i.e. company B has a right to but no obligation to sells goods to company A's customers)?

    #1686884
    wombataholic
    Participant

    It's the first one: “when company A has title to goods and leaves its possession with company B and asks them to sell upon a customer's request.”

    For the purposes of FAR, whoever has title to the goods includes them on their books.

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    #1686908
    SchruteBeet
    Participant

    @wombataholic Thanks for the clarification!

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