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Difficulty: HardNature, Features, and Terminology of Consignment Transactions

Tunde & Sons dispatched 400 crates of beverages to Obinna Enterprises to be sold on a commission basis under a standard consignment arrangement. Before Obinna Enterprises made any sales, the business went into liquidation due to insolvency. In accounting and law, how should the liquidator treat the 400 unsold crates of beverages?

  1. Return the entire stock to Tunde & Sons, because legal ownership remains with the consignor regardless of physical possession.Answer
  2. B
    Include the stock in Obinna Enterprises' pool of assets to settle general creditors, because physical possession transfers liability to the consignee.
  3. C
    Record the stock as a current asset of Obinna Enterprises subject to a court distribution order among all trade creditors.
  4. D
    Distribute the stock equally between the consignor and consignee under joint venture profit-sharing principles.

Answer

Return the entire stock to Tunde & Sons, because legal ownership remains with the consignor regardless of physical possession.
In a consignment transaction, the legal relationship established is that of principal (consignor) and agent (consignee). Title and ownership of the goods remain entirely with the consignor until the goods are sold to an external buyer. Consequently, if the consignee becomes insolvent, unsold consignment goods held on the premises are not part of the consignee's assets and must be surrendered back to the consignor.

Step-by-Step Solution

1
Identify the nature of the transaction
The transaction between Tunde & Sons and Obinna Enterprises is a consignment (principal-agent relationship), not an outright sale.
Goods sent on consignment are held by the consignee merely as an agent (bailee).
2
Determine ownership and title to goods
Title, ownership, and risk in consigned goods remain strictly with the consignor (Tunde & Sons) until sold to a third party.
Physical possession by the consignee does not pass ownership or title.
3
Apply insolvency accounting principles
Unsold consignment goods do not belong to the consignee and cannot form part of the consignee's insolvency estate.
The liquidator must return third-party property held on bailment to the rightful owner (consignor).

Key Concept

Principal-Agent Relationship and Ownership Rights in Consignment
Estimated Time:1m 30s
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Topics

Nature, Features, and Terminology of Consignment Transactions

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