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

Ade consigned goods to Chukwu and paid him a del-credere commission to guarantee payment from credit customers. During the trading period, Chukwu incurred bad debts from credit sales. How should these bad debts be recorded in Ade's ledger accounts?

  1. They are omitted completely from Ade's accounts because the bad debt loss is borne entirely by ChukwuAnswer
  2. B
    Debited to the Consignment Account as an operational expense of the consignment
  3. C
    Debited to Chukwu's Personal Account to increase the total balance owed by the consignee
  4. D
    Deducted from the cost of goods sent on consignment in the trading account

Answer

They are omitted completely from Ade's accounts because the bad debt loss is borne entirely by Chukwu.
Del-credere commission is an extra commission paid by the consignor to the consignee to bear the risk of bad debts arising from credit sales. Because the consignee assumes this risk, bad debts are not recorded in the consignor's ledger accounts (neither in the Consignment Account nor in the Consignee's Personal Account).

Step-by-Step Solution

1
Identify the nature of the commission granted to the consignee
Chukwu receives a del-credere commission, which specifically covers the risk of credit sales and potential bad debts.
Del-credere commission is paid to compensate the consignee for taking full responsibility for credit collection.
2
Determine the accounting treatment of bad debts in the consignor's books under a del-credere agreement
Since Chukwu bears the risk, Ade (the consignor) makes no entry for bad debts in the Consignment Account or Consignee Account.
The loss is absorbed by the consignee, so it does not affect the consignor's consignment profit or ledger accounts.

Key Concept

Accounting treatment of bad debts under del-credere commission in consignor's books
Estimated Time:45s
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Topics

Preparation of Consignment and Consignee Accounts in Consignor's Books

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