Special Revenue Recognition:

FRANCHISE and Consignment Sales Accounting JLM

FRANCHISE
The core principle of IFRS 15 is that an entity will recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. This core principle is delivered. in a five-step model framework:
1. Identify the contract with a customer
2. Identify all the individual performance obligations within the contract
3. Determine the transaction price
4. Allocate the price to the performance obligations
5. Recognize revenue as the performance obligations are fulfilled

The specific provision of the standards that deals with the accounting for franchise can be found on the licensing topic of
PFRS 15.
A Franchise is a type of license that a party (franchisee) acquires to allow them to have access to a business (the franchisor)
proprietary knowledge, processes and trademarks in order to allow the party to sell a product or provide a service under the
business name.

Two types of Franchise

1. A contract between two private entities or individuals.
2. A contract between private entity or an individual and the government.

Under the licensing section of PFRS 15, the promise to grant the license must be determined first whether the license of
Intellectual Property (IP) is distinct or not because PFRS 15 includes specific application guidance for distinct licenses of
IP.

For licenses that are not distinct, an entity will follow the general requirements in the standards to account for all promises
as a single performance obligation (that contains a license and at least one other good or service).

For distinct licenses of IP, the promise to grant a license is treated as a separate performance obligation from other promises
in the contract. An entity must determine whether the license transfers to the customer at a point in time or over time by
considering the nature of the promise to the customer. The standard states that entities provide their customers with either

➢ A right to access the entity's intellectual property as it exists throughout the license period, including any changes
to that intellectual property, which is recognized as revenue over time. Therefore, the consideration received is
recognized as revenue over the license period.

➢ A right to use the entity's intellectual property as it exists at the point in time when the license is granted, which is
recognized as revenue at a point in time. Therefore, the consideration received is recognized as revenue at the
time the license is provided.

Right to Access (Over Time)

The customer has the right to access the entity's IP as it exists throughout the license period if the customer cannot direct
the use of, and obtain substantially all of the remaining benefits from, the license at the point in time at which the license is
granted.

A license is a promise to provide a right to access if all of the following criteria are met:
1. The contract requires, or the customer reasonably expects, that the entity will undertake activities that significantly
affect the intellectual property to which the customer has rights.
2. The rights granted by the license directly expose the customer to any positive or negative effects of the entity's
activities.
3. The entity's activities do not result in the transfer of a good or a service to the customer as those activities occurs
(i.e., they do not represent a separate performance obligation).

Although not determinative, the existence of a shared economic interest between the parties (e.g., sales or usage-based
royalties) may be an indicator that the customer has a reasonable expectation that the entity will undertake such activities.

Right to Use (At a Point in Time)

The customer has the right to access the entity's IP as it exists throughout the license period if the customer can direct the
use of, and obtain substantially all of the remaining benefits from, the license at the point in time at which the license is
granted. If the license does not meet all three criteria, the license agreement provides a right to use the license and the
entity would recognize revenue at the point in time when the control of the license transfers to the customer.

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Sales Based or Usage Based Royalties
The standard provides explicit application guidance for recognizing sales-based and usage-based royalties from licenses
of IP. Specifically, the standard creates an exception to the requirement to estimate variable consideration for transactions
that involve sales and usage-based royalties resulting from the licenses of IP. As a result, these amounts are only recognized
at the later of when;
1. The sale or usage occurs or
2. The performance obligations (to which some or all of the sales or usage- based royalties have been allocated) have
been satisfied (or partially satisfied).

This exception may result in an accounting treatment that is similar to current practice.

FRANCHISE REVENUES
1. Initial Franchise Fees - it is a once off lump sum, paid by the franchisee to the franchisor, upon signing the franchise
agreement. It acts as a payment for:
a. Assistance in site selection, leased negotiation, financing and supervision of construction activity.
b. Initial training in all facets of operating a business
c. Assistance with staff recruitment and training
d. Access to preferential purchasing arrangements the franchisor has put in place.
e. Provision of bookkeeping and advisory services
f. Provision of quality control
g. Advertising and promotion
h. Assistance in the acquisition of signs, fixture and equipment

2. Continuing Franchise Fee (Royalty Fee) - it is a fee paid by the franchisee for the ongoing services (e.g. management
trainings, advertising, promotion, accounting, legal assistance and other special services received from franchisor.
Typically, it is computed based on a percentage of gross sale franchisee and it is paid on a regular basis.

CASES (IAS 18) Services Refund Collectability Earned/Unearned

(Performed) (Low/No) (Assured/Not)
1. reasonable expectation of refund and significant
performance by franchisor required
2. low expectation of refund, minimal amount of
future services to be provided by franchisor, and
collection of the note reasonably assured
3. no refund, substantial performance by franchisor
required, and collection reasonably assured
4. if down payment refundable, or substantial
performance by franchisor required
5. no refund of initial down payment, no
performance by franchisor required, and
collection highly uncertain

3. Franchisor’s Cost
– Overall objective is to match related costs and revenues
– Direct costs are deferred for any specific franchise sale where revenue has not been recognized
– Indirect costs, such as selling and administrative expenses, are expensed as incurred

4. Bargain Purchase
– When the franchisee may purchase assets at a lower than market price from the franchisor
– Portion of initial franchise fee is deferred if the bargain price is lower than normal selling price or if franchisor
does not make a reasonable profit
– Adjustment to selling price when assets are purchased by the franchisee

5. Options to Purchase
– Where the franchisor has the right to purchase the franchisee’s business
– Initial franchise fee recorded as a liability if it is probable that a purchase will occur
– When option is exercised, the liability would reduce the franchisor’s investment

-done-

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IAS 18
Problem 1
Conrad Franchising Corporation franchises its name to different people across the country. The franchise agreement
requires the franchisee to make an initial payment of P1,440,000 and signs a P3,840,000 non-interest-bearing note on the
agreement date. The note is to be paid in four (4) annual payments of P960,000 each year beginning December 31 from
the agreement date. The initial payment is refundable until the date of opening. Interest rates are assumed to be 10% for
this type of borrowing arrangement. (use four decimal points)
The franchiser agrees to make market studies, find a location, train the employees, and perform a few relatively minor
services. The following transactions in 20x4, describe he relationship with Rita, a franchisee:
January 3: Entered into a franchise agreement.
February 2: Completed a market study at a cost of P120,776 (direct costs).
June 13: General expenses paid P 50,000 (indirect costs)
August 8: Found suitable location, Service cost P 300,000 (direct costs)
November 2: Completed training program for employees, cost, P 700,000 (direct costs).
December 8: Franchise outlet opened, and business operations started.
December 31: Received first annual payment.
Required:
1. Prepare entries on the books of franchisor to record the following, assuming:
A. the collectability of the note is reasonably assured, and
B. the collectability of the note is not reasonably assured (use installment sales method.
2. Compute the revenue, gross profit and net income, assuming:
A. the collectability of the note is reasonably assured, and
B. the collectability of the note is not reasonably assured (use installment sales method).

Problem 2
MacDonald. Inc. charges P108,000 for a franchise, with P21,600 paid when the agreement signed and the balance in four
annual payments. The present value of the annual payments. discounted at 9%, is P69,978. The franchisee has the right
to purchase P24,000 of equipment P19,200. If the collectability of the payments is reasonably assured, and substantial
performance by Sweet. Inc. has occurred.
Required: Prepare entries on the books of franchisor to record the above transaction

Problem 3
AB Inc., franchisor, entered franchise agreement with AD Inc., franchisee on July 1, 2018. The initial franchise fee agreed
upon is Php 850, 000, of which Php 150, 000 is payable upon signing and the balance to be covered by a non-interest-
bearing note payable in four equal annual instalments. It was agreed that the down payment is not refundable,
notwithstanding lack of substantial performance of services by franchiser. Probability of collection is unlikely.
The following expenses were incurred:
Initial services:
Direct Cost Php 235, 000
Indirect Cost 64, 000
Continuing Services:
Direct Cost 23, 900
Indirect Cost 9, 000

The management of AD has estimated that they can borrow loan at the rate of 12%. The franchisee commenced its
operation on July 31, 2018. A continuing franchise fee equal is to 5% of its monthly gross sales. AD reported gross sales of
Php 950, 000 for the month. When AB prepares its financial statements on August 31, 2018, how much is the net income
to be reported? (use two decimal point)

Problem 4
On August 1, 2018, I’m Yours Inc. entered into franchise agreement with You’re Mine franchisee. The initial franchise fees
agreed upon is Php 246, 900, of which Php 46, 900 is payable upon signing and the balance to be covered by a non-
interest-bearing note payable in four equal annual installments. The down payment is refundable within 100 days. Collection
of the note is highly uncertain. Out-of-pocket cost of Php 125, 331 and Php 12, 345 were incurred for direct expenses and
indirect expenses respectively. Prevailing market rate is 9%. PV factor is 3. 2397. On the fiscal year ended October 31,
2018, how much income will the franchisor recognize?
A. Php 161, 985
B. Php -0-
C. Php 208, 885
D. Php 3, 645

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Problem 5
MIAH Inc charges an initial franchise fee of P115,000, with P25,000 paid when the agreement was signed and the balance
in five annual payments. The present value of the future payments, discounted at 10% is P68,234. The franchisee has the
option to purchase P15,000 equipment for P12,000. MIAH has substantially provided all initial services required and
collectability of the payments is reasonably assured. How much is the amount of revenue from franchise fees?
A. 25,000
B. 90,234
C. 93,234
D. 115,000

PFRS 15 Revenue from Contracts with Customers

Problem 1
Neil’s Foods enters into a franchise agreement on November 1, 20x7, giving Nathan Corp. the right to operate as a
franchisee of Neil's Foods for 5 years. Neil's charges Nathan an initial franchise fee of P1,425,000 for the right to operate
as a franchisee. Of this amount, P570,000 is payable when Nathan Corp. signs the agreement, and the balance is payable
in five annual payments of P171,000 each on December 31.
Nathan also promises to pay ongoing royalty payments of 1% of its annual sales (payable every January 31 of the following
year) and is obliged to purchase products from Neil's at its current standalone selling prices at the time of purchase. The
credit rating of Nathan indicates that money can be borrowed at 8%. Consider the following for allocation of the transaction
price at December 31, 20x7
Rights to the trade name, market area, technical and proprietary know-how P 570,000.00
Services- training. etc 283,751.70
Machinery and equipment, etc. (costing P285,000) 399,000.00
Total transaction price P 1,252,751.70
Training is completed in January 20x8, the equipment is installed in January 20x8. and Nathan holds a grand opening on
February 2, 20x8. On February 2, 20x8. franchise opens. Neil satisfies the performance obligations related to the franchise
rights, training, and equipment.
Required: Prepare entries on the books of franchisor Neil Foods on December 31, 20x7 and February 2, 20x8.

Problem 2
Nina, a new fast food chain, sells exclusive franchises for P25,000. For this fee, franchisees receive training, assistance on
site selection, assistance during the construction phase, and promotional considerations for the grand opening including a
visit by Nina. There is also a P500 per month continuation fee for institutional advertising and accounting services after the
store is open for business. On March 20 of the current year, Nina sold a franchise to Fatimah for the standard fee. The
franchisor received a 20% down payment and a 10%, four-year note for the balance. On June 15, Fatimah had her grand
opening and Nina had met all requirements for substantial performance. On July 15, Nina received P500 or the continuing
fee. Required: Prepare the appropriate journal entries for Nina at March 20, June 15, and July 15.

Problem 3
On January 1, 20x1, Miah Co. enters into a contract with a customer to transfer a license for a fixed fee of P100,000 payable
as follows:
• 20% is payable upon signing of contract.
• 80% is represented by a note receivable collectible in 4 equal annual installments starting December 31, 20x1. The
appropriate discount rate is 12%.
• The license transfers to the customer on January 3, 20x2.
• During 20x1, Miah Co. incurs direct contract costs of P20,000.
• Collectability of the note is reasonably assured.
• The license provides the customer with the right to use Miah's intellectual property as it exists at the point in time at
which the license is granted.
Requirement: Compute for the profits in 20x1 and 20x2, respectively.

Problem 4
On July 1, 20x1, JC Co. entered into three franchise agreements. Information on these agreements is summarized below:

Franchisee Probability of Collection Cash Down Payment PV of Note Direct Cost Incurred
A Reasonable Assured 20,000 60,747 32,000
B Uncertain 20,000 48,037 25,000
C Significantly uncertain 20,000 33,801 21,520
Totals 60,000 142,585 78,520

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Additional information:
• The cash down payments are non-refundable and were received upon the signing of contracts.
• The appropriate discount rate on all the contracts is 12%.
• The first installment on each of the note receivable is due on July 1, 20x2.
• It was assessed that the receivable from Franchisee B is doubtful of collection. This is because, at contract inception
JC Co. determines that the region where the customer operates is undergoing economic difficulty. Therefore, JC
Co. expects that the consideration will not be collected in full. However, JC Co. believes' that the region's economy
will recover in the near term and that the license will help the customer increase its sales. Accordingly, JC Co.
expects to provide the customer a price concession and concludes that it is probable that it will collect only half of
the P48,000 note receivable. The adjusted present value of the note is P24,018. The adjusted discount rate is 12%.
• All the three licenses provide the customers the right to use the entity’s intellectual property as it exists at the point
in time at which the license is granted.
• The licenses are transferred to the customers on July 1, 20x1.
Requirements: Compute for the total profit from the three contracts in 20x1.

MULTIPLE CHOICE PROBLEMS

1. Charot Inc. charges an initial franchise fee of P90,000 broken down as follows:
Rights to trade name, market area, and proprietary know-how P 40,000
Training services 11,500
Equipment (cost of P10,800) 38,500
Total initial franchise fee P 90,000
Upon signing of the agreement, a payment of P40,000 is due. Thereafter, two annual payments of P30,000 are required.
The credit rating of the franchisee is such that it would have to pay interest of 8% to borrow money. The franchise
agreement is signed on August 1, 20x8, and the franchise commences operation on November 1, 20x8. Assuming that
no future services are required by the franchisor once the franchise begins operations, what journal entry is included
on November 1, 20x8?
A. a credit to Unearned Franchise Revenue for P40,000.
B. a debit to Service Revenue for P11,500.
C. a debit to Sales Revenue for P38,500.
D. a debit to Unearned Franchise Revenue for P40,000.

2. Assume that the total training fees includes training services for the period leading up to the franchise opening (P5,500
value and for 3 months following opening, what journal entry is included on August 1, 20x8?
A. a credit to Unearned Service Revenue for P11,500.
B. a credit to Unearned Service Revenue for P6,000.
C. a debit to Sales Revenue for P38,500.
D. a debit to Unearned Franchise Revenue for P40,000.

3. On January 1, 20x4 Dairy Treats. Inc. entered into a franchise agreement with a company allowing the company to do
business under Dairy Treats’ name. Dairy Treats had performed substantially all required services by January 1, 20x4,
and the franchisee paid the initial franchise fee of P560,000 in full on that date. The franchise agreement specifies that
the franchisee must pay a continuing franchise fee of P48,000 annually, of which 20% must be spent on advertising by
Dairy Treats. What entry should Dairy Treats make on January 1, 20x4 to record receipt of the initial franchise fee and
the continuing franchise fee for 20x4?
A. Cash 608,000
Franchise Fee Revenue 560,000
Unearned franchise revenue 48,000
B. Cash 608,000
Unearned franchise revenue 608,000
C. Cash 608,000
Franchise revenue 560,000
Unearned franchise revenue 9,600
Revenue from Continuing Franchise Fees 38, 400
D. Prepaid advertising 9,600
Notes receivable 608000
Franchise revenue 560,000
Revenue from Continuing Franchise Fees 48,000
Unearned Franchise Fees 9,600

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4. Wynne Inc. charges an initial franchise fee of P920.000, with P200.000 paid when the agreement is signed and the
balance in five annual payments. The present value of the future payments., discounted at 10%. is P545,872. The
franchisee has the option to purchase P120,000 of equipment for P96,000. Wynne has substantially provided all initial
services required and collectability of the payments is reasonably assured. How much is the amount of revenue from
franchise fees?
A. P200,000
B. P745,872
C. P721,872
D. P920,000

K Group of Companies charges an initial fee of P1,600.000 for a franchise, with P320,000 paid when the agreement is
signed and the balance in four annual payments. The present value of the annual payments discounted at 10%. is
P1,014,000. The franchisee has the right to purchase P60,000 of kitchen equipment and supplies for P50,000. An additional
part of the initial fee is for advertising to be provided by Pasta Inn during the next five years. The value of the advertising is
P1,000 a month. Collectability of the payments is reasonably assured, and Pasta Inn has performed all the initial services
required by the contract.
5. When K prepares its financial statements, how much is the franchise fee revenue to be reported?
A. P1,264,000
B. P1,334,000
C. P1,324,000
D. P1,600,000

6. When K prepares its financial statements, how much is the unearned franchise fee revenue to be reported?
A. Zero
B. P60,000
C. P10,000
D. P70,000

J M sells franchise arrangements throughout Luzon and Visayas. Under a franchise agreement, M receives P600,000 in
exchange for satisfying the following separate performance obligations:
• franchisees have a five-year right to operate as a M retail establishment in an exclusive sales territory
• franchisees receive initial training and certification as a M Mechanic, and
• franchisees receive a M building and necessary equipment
J M building and necessary equipment. The stand-alone selling price of the initial training and certification is P15,000, and
P450,000 for the building and equipment. Joey estimates the stand-alone selling price of the five-year right to operate as a
J M establishment using the residual approach. Joey received P75,000 on July 1, 20x6, from Janellah and accepted a note
receivable for the rest of the franchise price. Joey will construct and equip Janellah’s building and train and certify Janellah
by September 1, and Janellah’s five-year right to operate as a M establishment will commence on September 1 as well.
7. What amount would Joey calculate as the stand-alone selling price of the five year right to operate as a J M retail
establishment?
A. P585,000
B. P135,000
C. P150,000
D. P600,000

8. What journal entry would Joey record on July 1, 2016, to reflect the sale of a franchise to Janellah?
A. Cash 600,000
Unearned franchise revenue 600,000
B. Cash 75,000
Notes receivable 525,000
Unearned franchise revenue 600,000
C. Cash 75,000
Notes receivable 525,000
Franchise revenue 75,000
Unearned franchise revenue 525,000
D. Cash 75,000
Notes receivable 525,000
Franchise revenue 600,000

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9. How much revenue would Joey recognize in the year ended December 31, 2016, with respect to its franchise
arrangement with Janellah? (ignore any interest on the note receivable.)
A. P 9,000
B. P465,000
C. P474,000
D. P450,000

Vann enters into a contract for 2 years with Arvin to transfer a license. The agreement signed on January 2, 2020 called for
a P30,000 down payment plus a 10% interest bearing note of P20,000 payable in two annual payments starting December
31, 2020. The license provides that Arvin has the right to use the secret formula to produce healthy juice. The license does
not explicitly require Vann to undertake activities that will significantly affect the secret formula to which Arvin has rights.
The collectability of the note is reasonably assured.
10. What is the total revenue to be recognized on December 31, 2020?
A. P20,000
B. P52,000
C. P50,000
D. P41,000

11. Assume that the license provides Arvin the right to access the secret formula to produce healthy juice. Arvin is bound
by the terms of the contract to follow with the policies on the use of the secret formula by Vann but is given the right to
any subsequent modifications to the secret formula. What is the total revenue to be recognized on December 31, 2020?
A. P27,000
B. P50,000
C. P25,000
D. P21,000

Vann enters into a contract for 2 years with Arvin to transfer a license. The agreement signed on January 2, 2020 called for
a P30,000 down payment plus a 10% non-interest-bearing note of P20,000 payable in two annual payments starting
December 31, 2020. The management of Arvin Co. has estimated that they can borrow a loan of this type at the rate of
10%. The license provides that Arvin has the right to use the secret formula to produce healthy juice. The license does not
explicitly require Vann to undertake activities that will significantly affect the secret formula to which Arvin has rights. The
collectability of the note is reasonably assured. (use 4 decimal points)

12. What is the total revenue to be recognized on December 31, 2020?

A. P49,090
B. P17,355
C. P50,000
D. P47,355

13. Assume that the license provides Arvin the right to access the secret formula to produce healthy juice. Arvin is bound
by the terms of the contract to follow with the policies on the use of the secret formula by Vann but is given the right to
any subsequent modifications to the secret formula. What is the total revenue to be recognized on December 31, 2020?
A. P23,677.50
B. P25,000.00
C. P47,355.00
D. P25,413.00

Calix, franchisor, entered into a franchise agreement with Jeremiah, franchisee, on July 1, 2020. The total franchise fee
agreed upon is P550,000, of which P50,000 is payable upon signing and the balance is covered by a non-interest-bearing
note payable in four equal annual installments. It was agreed that the down payment is not refundable. The direct franchise
cost incurred was P325,000. The management of Jeremiah has estimated that they can borrow a loan of this type at the
rate of 12%. The franchisee commenced its operations on July 31, 2020. The contract provides that the franchisee has the
right to use the entity's intellectual property as it exists at the point in time at which the franchise is granted.

14. How much is the net income (loss) to be reported on July 31, 2020? (Use PV factor of 3.04).
A. P105,000
B. P433,800
C. P108,800
D. P430,000

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15. Assuming the collection is not reasonably assured. The net income (loss) will be on July 31, 2020:
A. P14,357
B. P (15,240)
C. P (14,040)
D. P3,800

Bean Coffee Inc. operates and franchises coffee shops around the Philippines. On January 1, 2020, Bean Coffee entered
into a franchise agreement with a franchisee for a non-refundable initial franchise fee of P8,000,000 payable upon signing
of contract and ongoing payment of royalties based on 5% of franchisee's sales. The contract provides that Bean Coffee
shall render the following obligations to franchisee: (1) Construction of the coffee shop and delivery of coffee shop
equipment's with stand-alone selling price of P5,000,000; (2) Supplies of 100,000 units of coffee raw materials and supplies
with stand-alone selling price of P3,000,000; and 3) Allowing the franchisee to use the Bean Coffee’s trademark and
tradename for a period of 10 years with stand-alone selling price of P2,000,000. Bean Coffee determines that the three
obligations under the contract with franchisee are each distinct, and therefore, need to be accounted for as a separate
performance obligation.

As of July 1, 2020, Bean Coffee has already completed the construction of the building and has fully delivered the relevant
coffee shop equipment's. However, only 40,000 units of coffee raw materials and supplies have been delivered to the
franchisee and eventually consumed by the coffee shop customers as of December 31, 2020. For the year ended December
31, 2020, the franchisee reported sales revenue of P1,000,000.
16. How much total revenue shall be reported by Bean Coffee Inc. for the year ended December 31, 2020?
A. P5,170,000
B. P5,820,000
C. P6,410,000
D. P4,930,000

On January 2, 2020, Paul Company signed an agreement to grant a license over a patented technology to Anthony Inc., for
an initial contract fee of P500,000 for 4 years. Of this amount, P100,000 was paid when the agreement was signed and the
balance payable in four annual payments beginning on December 31, 2020. Paul signed a non-interest-bearing note for the
balance. Paul's rating indicates that he can borrow money at 16% for the loan of this type. Assume that substantial services
amounting to P150,000 had already been rendered by Paul and that additional indirect cost of P12,000 was also incurred.
PV factor is 2.80. The collectability of the note is reasonably assured.
On January 31, 2020, the license is transferred to Anthony. The license agreement provides that Anthony Inc. has the right
to use the entity's intellectual property as it exists at the point in time at which the license is granted.
17. How much is the total net income to be reported on December 31, 2020?
A. P230,000
B. P274,800
C. P218,000
D. P262,800

18. Assuming the license provides Anthony the right to access the entity's intellectual property as it exists throughout the
license period. What is the total net income to be reported on December 31, 2020?
A. P (22,200)
B. P45,500
C. P90,300
D. P262,800

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CONSIGNMENT SALES ARRANGEMENTS
Entities frequently deliver inventory on a consignment basis to other parties (e.g., distributor, dealer). By shipping on a
consignment basis, consignors are able to better market products by moving them closer to the end user.

However, they do so without selling the goods to the intermediary (consignee). The Boards provided the following
indicators that an arrangement is a consignment arrangement:
Under PFRS 15 the following indicators to determine that an arrangement is a consignment arrangement includes, but are
not limited to, the following:
a) The product is controlled by the entity until a specified event occurs, such as the sale of the product to a customer
of the dealer or until a specified period expires;
b) The entity is able to require the return of the product or transfer the product to a third party (such as another
dealer); and
c) The dealer does not have an unconditional obligation to pay for the product (although it might be required to pay a
deposit).

Entities entering into a consignment arrangement must determine the nature of the performance obligation (i.e., whether
the obligation is to transfer the inventory to the consignee or to transfer the inventory to the end customer). This
determination is based on whether control of the inventory has passed to the consignee upon delivery. Typically, a consignor
will not relinquish control of consignment inventory until the inventory is sold to the end-consumer or, in some cases, when
a specified period expires. Consignees commonly do not have any obligation to pay for the inventory, other than to pay the
consignor the agreed-upon portion of the sale price once the consignee sells the product to a third party.

As a result, revenue generally would not be recognized for consignment arrangements when the goods are delivered
to the consignee because control has not yet transferred (i.e., the performance obligation to deliver goods to the customer
has not yet been satisfied)
The main feature of consignment sales:
1. The consigned goods remain the inventory of the consignor (principal).
2. The consignee (agent) sells the goods on account and risk of the consignor (principal).
3. All expenses incurred by the consignee on the consigned goods are reimbursed by the consignor.
4. The consignee is expected to take reasonable care of the consigned goods
5. The consignee is not liable to pay the consignor until the goods are sold to a third party (customer).

The following expenses that are to be allocated to sold and unsold units (Inventoriable costs):
1. Shipping costs, freight and handling cost paid by the consignor upon shipment.
2. Freight and cartage paid by the consignee upon receipt of the shipment.
3. Packing expenses related to consigned goods
4. Insurance of consigned goods

The following are examples of expenses that are considered outright expenses chargeable directly to the sold units:
1. Delivery and installation
2. Commission
3. Advertising
4. Insurance while in transit
5. Reconditioning costs on delivered units
6. Expenses relating to returned units.
-done-
Problem 1
Jingka Juice Supplier sends P60,000 (120 sachets of herbal foods worth of goods on consignment to Lipton Enterprises.
Following are the costs incurred:
• Shipping costs of P600 are paid by Jingka Juice.
• Reimbursable finishing costs of P2,400 are paid by Lipton.
• Lipton advances P3,360.
• On December 31, 20x4, one-half of the goods on consignment are sold for P48,000 cash.
• A 10% commission on sales is earned by Lipton according to the Terms the consignment.
Required:
1. The journal entries shown below would be made on the consignor's and consignee's books (assume the use of
perpetual inventory).
2. Determine the amount of remittance by preparing the account sales.
3. Computer the amount of Net income

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Problem 2
On May 30, 20x8, Sandy and Nino Group consigned 80 freezers to, costing P50,000 each, to Val and Rogelio Company.
The cost of shipping the freezers amounted to P84,000 and was paid by Sandy and Nino Group. On December 30, 20x8,
a report was received from the consignee, indicating that 40 freezers had been sold for P75.000 each. Remittance was
made by the consignee for the amount due after deducting a commission of 6%, advertising of P20,000, and total installation
costs of P32.000 on the freezers sold.
Required:
1. Compute the inventory value of the units unsold in the hands of the consignee
2. Compute the profit for the consignor for the units sold.
3. Compute the amount of cash that will be remitted by the consignee

Problem 3
Summit Electronics Company sends appliances to dealers on a consignment basis. The selling price per unit is P920 and
the dealer earns a 30% commission. The manufacturing cost of the appliance to Summit Electronics is P570. Assume that
in 20x4, 800 units were sent on consignment to Farley Hardware. Four hundred of these units were sold for cash, and by
December 31, 20x4, remittance had been made to Summit Electronics for 380 units.
Required: Prepare the required journal entries on the books of Summit Electronics Company and Farley Hardware for the
transactions in 20x4.

MULTIPLE CHOICE PROBLEMS

On June 1, DD Company shipped twenty-five DVD to BB View Store on consignment. The DVD is to be sold at an advertised
price of P200 per item. The cost of each DVD to the consignor is P100. The consignor paid P75 to ship the merchandise.
Commission is to be 25% of sales price. During the month, two DVD were returned.
On June 30, BB View Store remitted the amount due to consignor after deducting commission of P400.
1. How much is the amount remitted by BB View Store?
A. P1,100
B. P1,200
C. P1,600
D. P2,000

2. What is the total consignment profit?

A. P370
B. P720
C. P415
D. P800

3. How much is the cost of inventory on consignment amounted?

A. P1,400
B. P1,550
C. P1,500
D. P1,545

ITS Trading consigned 100 beds costing P600 each to PP Company. The advertised selling price is P1,000 each bed. The
consignment agreement provides that the consignee is to be allowed a commission of 15% of the selling price. Furthermore,
PP Company has to draw a sight draft or 60% of the cost of the beds: the advance is to be recovered periodically by monthly
deductions in proportion to units sold) from the remittances which accompany the account sales. All expenses of the
consignee are to be deducted monthly as incurred. At the end of the first month, the consignee rendered an account sale
showing among others the following charges: Commission, P2,250; Advertising, P1,500; and Delivery Expense, P750.
4. What is the number of units sold by PP Co.?
A. 10
B. 15
C. 20
D. 25

5. How much is total remittance to TS Co. for the month?

A. P1,500
B. P4,500
C. P5,100
D. P5,500

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6. What is the consignment profit (loss) of TS Co.?
A. P3,412.50
B. (P1,500.00)
C. P2,137.50
D. None of the above

On November 30, Northrup Company consigned 90 freezers to Watson Company for sale at P1,600 each and paid P1,200
in transportation costs. A report of sales was received on December 30 from Watson reporting the sale of 20 freezers,
together with a remittance of the P27,200 balance due. The remittance was net of the agreed 15% commission.
7. How much, and in what month, should Northrup recognize as consignment sales revenue?
November December
A. P-0- P32,000
B. P144,000 P-0-
C. P-0- P27,200
D. P142,800 P-0-

The CC Manufacturing Company delivered ten DVD players to CLTV Company on consignment. These DVD player cost
P3,000 each and are to be sold at P5,000 each. The CC Manufacturing Co. paid shipment cost of P2,500. CLTV Co.
submitted an account sale stating that it had returned one unit and was remitting P21,900. This amount represents the total
amount due to CC Manufacturing Co. after deducting the following from the selling price of the DVD player sold:
Commission 20% of selling price
Advertising P1,000
Delivery and installation P 600
Cartage on consigned goods P 500
8. How many units was sold by Tv Co.?
A. 4
B. 5
C. 6
D. None of the above

9. How much is the profit (loss) on consignment realized by CC Manufacturing Company?

A. P2,300
B. (P2,550)
C. P2,480
D. None of the above

10. What amount is the cost of inventory in the hands of CLTV Company?
A. P10,080
B. P10,200
C. P10,150
D. None of the above

On May 1, 20x4, TV Inc. consigned 80 VCD players to Ed's TV. The VCD player cost P270. Freight on the shipment paid
by Ed's TV was P600. On July 10, TV Inc. received an account sale and P12,900 from Ed's TV. Thirty VCD players had
been sold and the following expenses were deducted:
Freight P 600
Commission (20% of sales price... ?
Advertising P 390
Delivery P 210

11. What is the total sales price of the VCDs sold by Ed's TV?
A. P15,375
B. P16,388
C. P16,125
D. P17,625

12. How much is the net profit?

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13. At what amount should the inventory of VCDs be reported and on whose balance sheet?
Balance Amount
Sheet of Inventory
A. TV Inc. P13,875
B. Ed TV P 13,875
C. TV Inc. P 13,500
D. Ed TV P13,500

On May 15, 20x4, AA Sales Company received a shipment of merchandise with a selling price of P15,000 from PC
Company. The consigned goods cost PC Company P10,000 and freight charges of P120 had been paid to ship the goods
to AA Sales Company. The consignment arrangement provided for a sale of merchandise on credit with terms of 2/10, n/30.
The 15% commission is to be based on the account receivable collected by the consignee. Cash discounts taken by
customers, expenses applicable to goods on consignment and any cash advanced to the consignor are deductible from the
remittance by the consignee. AA Sales Company advanced P6.000 to PC Company upon receipt of the shipment. An
expense of P800 was paid by AA. By June, 20x4, 70% of the shipment had been sold, and 80% of the resulting accounts
receivable had been collected. all within the discount period. Remittance of the amount due was made on June 30, 20x4.
14. What is the amount of cash remitted by AA Sales Company?
A. 172
B. 972
C. 800
D. 2,340

15. How much is the profit on consignment?

A. 750
B. 873
C. 1,188
D. 1,428

16. What is the total cost of unsold units in the hands of AA?
A. 3,186
B. 1,500
C. 3,036
D. None of the above

On May 1, RR Products Company ships five (5) of its appliances to SZ Company on consignment. The cost of the appliances
shipped is P155 per unit. The consignor paid shipping costs totaling P50. Each unit is to be sold at P250 payable P50 in
the month of purchase and P10 per month thereafter. The consignee is entitled to 20% of all amounts collected on
consignment sales. SZ Company was able to sell 3 appliances in May and 1 in June. Regular monthly collections by the
consignee, and appropriate cash remittances have been made to the consignor at the end of each month.
17. What is the total amount of remittance to consignor as of June?
A. P-0-
B. P184
C. P64
D. P200

18. How much is the profit on consignment?

A. P150
B. P294
C. P140
D. None of the above

19. What is the cost of inventory on consignment?

A. P155
B. P165
C. P245
D. None of the above Con

20. NN Company consigns sign pens to retailers, debiting Accounts Receivable for the retail sales price of the sign pens
consigned and crediting Sales. All costs relating to the consigned sign pens are debited to expenses of the current
accounting period. Net remittances of the Consignees are credited to Accounts Receivable. In December, 800 sign

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FRANCHISE and Consignment Sales Accounting JLM
pens costing P60 each and retailing for P100 a unit were consigned SS Store. Freight cost of P800 was debited to
Freight Expense by the consignor. On December 31, SS Store remitted P35.505to NN Company in full settlement of
the balance due. Accounts Receivable was credited for this amount. The consignee deducted a commission on each
sign pens sold and P45 for delivery expense. How many units of sign pens was sold by SS store?
A. 355
B. 400
C. 395
D. None of the above

Information relating to regular sales and consignment sales of EE Products for the year ended June 30, 20x4 follows:
Regular Sales Consignment Sales Total
Sales P120,000 P30,000 P150,000
Cost of Sales 84,000 26,000 110,000
Operating expenses ? 1,760 16,910

You ascertain that merchandise costing P6,500 are in the possession of consignees and are included in the cost of
consigned merchandise sold. Operating expenses of P15,150 (more than half of which are fixed) are to be allocated to
regular sales and to consignment sales based on volume. The P1,760 operating expenses relating to consignment sales
include a commission of 5% and P260 Costs incurred by consignees relating to the entire shipment of merchandise worth
P26,000.
21. How much is the net income on regular sales?
A. P30,280
B. P23,880
C. P17,380
D. None of the above

22. How much is the net income on consignment sales?

A. P8,740
B. P2,240
C. P5,710
D. None of the above

23. Seahawks, Inc. had the following consignment transactions during December
Inventory shipped on consignment to Ashe Company P18,000
Freight paid by Seahawks 900
Inventory received on consignment from Fenn Company 12,000
Freight paid by Fenn 500
No sales of consigned goods were made through December 31. On Seahawks' December 31 balance sheet, how
much should be included as consigned inventory?
A. P18,900
B. P12,500
C. P18,000
D. P12,000

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