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Difficulty: MediumTreatment of Normal and Abnormal Losses in Consignment

In consignment accounting, an abnormal loss is credited to the Consignment Account at cost plus proportional expenses, whereas a normal loss is not separately credited to the Consignment Account but instead inflates the cost per unit of the remaining good units.

Answer: Answer

Answer

The statement is True.
The statement is correct because normal loss is unavoidable and treated by adjusting the unit cost of surviving units without a credit entry to the Consignment Account, while abnormal loss is avoidable, valued including proportionate expenses, and explicitly credited to the Consignment Account.

Step-by-Step Solution

1
Analyze the accounting treatment of normal loss.
Normal loss is inherent and unavoidable. It requires no journal entry crediting the Consignment Account. Instead, the cost per unit of remaining good units is recalculated using the formula: Total Cost / (Total Units - Normal Loss Units).
To ensure the remaining inventory absorbs the cost of natural and expected loss.
2
Analyze the accounting treatment of abnormal loss.
Abnormal loss is accidental and avoidable. Its valuation equals: Cost of lost units + Proportional consignor expenses + Proportional consignee non-recurring expenses prior to loss. This value is credited to the Consignment Account.
To prevent extraordinary losses from distorting the true operating profit or loss of the consignment.
3
Evaluate the statement.
The statement correctly contrasts the crediting of abnormal loss with the cost-absorption mechanism of normal loss.
Both components accurately state standard financial accounting rules for consignment transactions.

Key Concept

Treatment of Normal and Abnormal Losses in Consignment
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Topics

Treatment of Normal and Abnormal Losses in Consignment

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