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Difficulty: MediumTreatment of Normal and Abnormal Losses in Consignment

Ade consigned 500 drums of vegetable oil costing ₦10,000 per drum to an agent in Kaduna. Ade paid carriage and insurance costs totaling ₦200,000. During transit, 50 drums were completely destroyed in an accident. The consignee subsequently paid ₦90,000 for clearing charges and ₦50,000 for warehouse rent. What is the value of the abnormal loss to be credited to the Consignment Account?

  1. A
    ₦500,000
  2. ₦520,000Answer
  3. C
    ₦529,000
  4. D
    ₦534,000

Answer

The value of the abnormal loss to be credited to the Consignment Account is ₦520,000.
The correct valuation of ₦520,000 represents the original purchase cost of the 50 lost drums (50 × ₦10,000 = ₦500,000) plus their proportionate share of the consignor's transit expenses ((50 / 500) × ₦200,000 = ₦20,000). Since the accident occurred in transit, no consignee expenses are attached.

Step-by-Step Solution

1
Calculate the total cost incurred by the consignor before transit.
Total consignor cost = Cost of goods + Consignor expenses = (500 × ₦10,000) + ₦200,000 = ₦5,000,000 + ₦200,000 = ₦5,200,000.
Abnormal loss in transit must absorb its proportionate share of expenses incurred prior to the point of loss.
2
Calculate the cost per drum before transit.
Cost per drum = ₦5,200,000 / 500 drums = ₦10,400 per drum.
This establishes the total unit cost including consignor's carriage and insurance.
3
Compute the value of the 50 destroyed drums.
Abnormal Loss Value = 50 drums × ₦10,400 = ₦520,000.
Consignee expenses paid after the transit accident cannot be attached to goods already lost in transit.

Key Concept

Valuation of Abnormal Loss in Transit
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Topics

Treatment of Normal and Abnormal Losses in Consignment

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