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Difficulty: MediumPreparation of Consignment and Consignee Accounts in Consignor's Books

Kalu Enterprise consigned 200200 cartons of goods to Bisi Traders at a cost price of ₦5,000\text{₦}5,000 per carton. Kalu paid ₦40,000\text{₦}40,000 for freight and insurance. Bisi Traders sold 150150 cartons at ₦6,000\text{₦}6,000 per carton and incurred selling expenses of ₦20,000\text{₦}20,000. Bisi Traders is entitled to a 5%5\% ordinary commission and a 2.5%2.5\% del-credere commission on total sales. During the period, bad debts arising from credit sales amounted to ₦15,000\text{₦}15,000. What is the net amount Bisi Traders will remit to Kalu Enterprise?

  1. A
    \text{₦}772,500
  2. B
    \text{₦}797,500
  3. \text{₦}812,500Answer
  4. D
    \text{₦}820,000

Answer

The net amount to be remitted by Bisi Traders to Kalu Enterprise is ₦812,500\text{₦}812,500.
The correct net amount remitted is calculated by taking total sales proceeds of ₦900,000\text{₦}900,000 (150×₦6,000150 \times \text{₦}6,000) and subtracting the consignee's allowable deductions: selling expenses of ₦20,000\text{₦}20,000 and total commission of ₦67,500\text{₦}67,500 (7.5%7.5\% of ₦900,000\text{₦}900,000). Because Bisi Traders receives a del-credere commission, bad debts are borne entirely by the consignee and are not deducted from the consignor's funds, giving a net balance of ₦812,500\text{₦}812,500.

Step-by-Step Solution

1
Calculate the total gross sales proceeds realized by Bisi Traders.
Total Sales = 150 cartons×₦6,000=₦900,000150 \text{ cartons} \times \text{₦}6,000 = \text{₦}900,000.
This represents the total credit entry to Bisi Traders' account in Kalu's ledger.
2
Calculate the total commission earned by Bisi Traders (ordinary + del-credere).
Total Commission Rate = 5%+2.5%=7.5%5\% + 2.5\% = 7.5\%. Total Commission = 7.5%×₦900,000=₦67,5007.5\% \times \text{₦}900,000 = \text{₦}67,500.
Bisi Traders is entitled to deduct both ordinary and del-credere commissions from the sales proceeds.
3
Determine the treatment of bad debts and calculate total allowable deductions.
Bad debts of ₦15,000\text{₦}15,000 are absorbed by Bisi Traders because a del-credere commission was paid. Total Deductions = Expenses (₦20,000\text{₦}20,000) + Commission (₦67,500\text{₦}67,500) = ₦87,500\text{₦}87,500.
Del-credere commission guarantees payment from buyers, shifting credit risk from consignor to consignee.
4
Compute the net remittance balance in the Consignee Account.
Net Remittance = Total Sales (₦900,000\text{₦}900,000) - Total Deductions (₦87,500\text{₦}87,500) = ₦812,500\text{₦}812,500.
This is the net cash/bank draft balance owing from Bisi Traders to Kalu Enterprise.

Key Concept

Accounting for Consignee Personal Account and Del-Credere Commission in Consignor's Ledger
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Topics

Preparation of Consignment and Consignee Accounts in Consignor's Books

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