Adeola dispatched 500 bags of rice on consignment to Babatunde. Under the consignment agreement, Babatunde receives an ordinary commission of 5% on total sales and a del-credere commission of 2.5% on credit sales. During the period, Babatunde sold 50 bags on credit, but the buyer defaulted completely and the debt became irrecoverable. Which of the following statements correctly describes the accounting treatment of this bad debt loss?
- AThe loss is charged directly to Adeola's consignment account, reducing the net proceeds remitted by Babatunde.
- The loss is borne entirely by Babatunde and debited to his commission/profit and loss account, leaving the amount due to Adeola unaffected.Answer
- CThe loss is shared equally between Adeola and Babatunde because consignment is a temporary joint venture profit-sharing arrangement.
- DThe loss is deducted from the proforma invoice total issued at the time of dispatch to adjust the initial inventory valuation.
Answer
The loss is borne entirely by Babatunde and debited to his commission/profit and loss account, leaving the amount due to Adeola unaffected.
In consignment accounting, a del-credere commission is an additional commission paid by the consignor to the consignee to guarantee payment for goods sold on credit. By accepting this commission, the consignee agrees to absorb any credit default losses. Consequently, bad debts are treated as an expense of the consignee and do not reduce the amount payable to the consignor.
Step-by-Step Solution
Key Concept
Del-Credere Commission and Risk Allocation