Kauf Co. had the following amounts related to the sale of consignment inventory:
Cost of merchandise shipped to consignee $72,000
Sales value for 2/3rds of inventory sold by consignee 80,000
Freight cost for merchandise shipped 7,500
Advertising paid for by consignee, to be reimbursed 4,500
10% commission due the consignee for the sale 8,000
What amount should Kauf report as net profit(loss) from this transaction for the year?
A. $(12,000)
B. $8,000
C. $14,500 CORRECT
D. $32,000
Explanation: The sale was for $80,000, but a 10% commission of $8,000 was paid, so the net revenue was $72,000. The cost of the goods sold was 2/3rds of cost and freight of $72,000 and $7,500 (2/3rds of $79,500, or $53,000). The gross profit would be $72,000 less $53,000, or $19,000. The net profit is gross profit less the advertising of $4,500, thus $14,500.
My issue here is that I have no clue how you are supposed to know that the freight is part of CoGS an not a selling expense. I was under the impression that Freight-in is CoGS and Freight-out was a selling expense. But the question does not tell you if this was freight cost being shipped to consignee or not. Unless shipping paid to ship to the consignee is also considered CoGS… I am so lost here.
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