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Difficulty: Very hardNature, Features, and Terminology of Consignment Transactions

Musa & Co. sent 200 packages of textiles to Danladi Ltd to be sold on consignment. Danladi Ltd accepted a 90-day bill of exchange as an advance, paid unloading expenses, and subsequently sold 150 packages on credit, out of which a debtor became insolvent. Under what condition is Danladi Ltd legally required to absorb this credit loss, and what document did Musa & Co. forward upon dispatching the goods?

  1. When Danladi Ltd earns a del credere commission; using a proforma invoiceAnswer
  2. B
    When Danladi Ltd earns an overriding commission; using an Account Sales
  3. C
    When Musa & Co. transfers legal title of ownership upon dispatch; using a sales invoice
  4. D
    When Danladi Ltd sells above the specified minimum selling price; using a debit note

Answer

Danladi Ltd is legally required to absorb the credit loss when earning a del credere commission, and the initial dispatch of goods by Musa & Co. is documented using a proforma invoice.
In consignment accounting, bad debts become the liability of the consignee only when a del credere commission is paid to them for taking on credit risk. Additionally, because consignment is not an outright sale and ownership stays with the consignor, the goods are forwarded alongside a proforma invoice detailing quantity and nominal price rather than a commercial sales invoice.

Step-by-Step Solution

1
Analyze the legal relationship and risk allocation regarding bad debts in consignment transactions.
In a principal-agent consignment relationship, bad debt risk normally rests with the consignor (principal). However, if the consignees (agent) receive an extra allowance known as a del credere commission, they assume full responsibility for any credit losses arising from default by buyers.
Del credere commission specifically compensates the agent for bearing the credit risk of default.
2
Identify the primary document issued by the consignor upon dispatching consignment goods.
When goods are sent on consignment, ownership remains with the consignor. Therefore, a proforma invoice (containing details of quantity, description, and nominal value) is sent instead of a regular sales invoice.
A sales invoice implies a transfer of ownership and debt creation, whereas a proforma invoice serves purely as an information/statement document.
3
Combine both findings to select the matching condition and document.
The correct combination is del credere commission for bad debt absorption and proforma invoice for dispatch documentation.
This correctly synthesizes the terminology and features of consignment contracts.

Key Concept

Features and Terminology of Consignment: Del Credere Commission and Proforma Invoice
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Topics

Nature, Features, and Terminology of Consignment Transactions

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