Examkin

Question

Difficulty: MediumNature, Features, and Terminology of Consignment Transactions

Folake dispatched a batch of merchandise to Ibrahim to be sold on her behalf. Prior to the sale of the merchandise, an accounting audit was conducted at year-end. Which of the following statements correctly describes the legal relationship between Folake and Ibrahim and the ownership status of the unsold merchandise?

  1. Folake is the principal and retains legal ownership of the merchandise, while Ibrahim acts as an agent holding possession.Answer
  2. B
    Ibrahim becomes the legal owner of the merchandise immediately upon taking physical custody at his premises.
  3. C
    Folake and Ibrahim become equal partners sharing joint ownership of the merchandise.
  4. D
    Ibrahim is a trade debtor who owes Folake the full value of the merchandise upon receipt of the proforma invoice.

Answer

Folake is the principal and retains legal ownership of the merchandise, while Ibrahim acts as an agent holding possession.
In consignment accounting, the transaction is governed by the law of agency. The consignor acts as the principal who retains legal ownership of the goods until they are sold, while the consignee acts as an agent holding custody and carrying out sales under the principal's instructions.

Step-by-Step Solution

1
Analyze the nature of the transaction
The arrangement represents a consignment transaction where goods are sent to be sold on behalf of the sender.
Consignment involves sending goods to an agent for sale without transferring ownership.
2
Determine legal title versus physical possession
Folake (consignor/principal) holds legal title, while Ibrahim (consignee/agent) holds physical possession.
Under agency rules, ownership remains with the principal until the agent executes a sale to an external buyer.

Key Concept

Principal-Agent Relationship and Legal Title in Consignment
Rate this question

Topics

Nature, Features, and Terminology of Consignment Transactions

More questions from this topic