FUNDAMENTALS OF ACCOUNTING - CHAPTER 7

CHAPTER - 7 ACCOUNTING FOR SPECIAL TRANSACTIONS Unit 1 Consignment Copyright -The Institute of Chartered Accountants of India CONSIGNMENT Learning Objectives : After studying this unit, you will be able to : (cid:2) Understand the special features of consignment business, meaning of the terms consignor and consignee. (cid:2) Analyse the difference between the two transactions – sale and consignment and understand that why consignment is termed as special transaction. (cid:2) Practise the accounting treatments for consignment transactions and events in the books of consignor and consignee. (cid:2) Note the variations in accounting when goods are sent at cost and goods are sent above the cost. (cid:2) Learn the technique of computing value of closing stock lying with the consignor and also the amount of stock reserve in it. (cid:2) Learn the technique of computing cost of abnormal loss and treatment of insurance claim in relation to it. (cid:2) Understand the distinction between ordinary commission, del-credere commission and over-riding commission paid to the consignee. (cid:2) See the variation of accounting treatment for bad debts when consignee is paid ordinary commission and when consignee is paid del-credere commission in addition. (cid:2) Understand the reason of including/excluding various expenditures to cost while valuing the goods returned by the consignee. 1. MEANING OF CONSIGNMENT ACCOUNT To consign means to send. In Accounting, the term "consignment account" relates to accounts dealing with a situation where one person (or firm) sends goods to another person (or firm) on the basis that the goods will be sold on behalf of and at the risk of the former. The following should be noted carefully: (i) The party which sends the goods (consignor) is called principal. (ii) The party to whom goods are sent (consignee) is called agent. (iii) The ownership of the goods, i.e., the property in the goods, remains with the consignor or the principal – the agent does not become their owner even though they are in his possession. On sale, of course, the buyer will become the owner. (iv) The principal does not send an invoice to the agent. He sends only a proforma invoice, a statement that looks like an invoice but is really not one. The object of the proforma invoice is only to convey information to the agent regarding particulars of the goods sent. (v) Usually, the agent recovers from the principal all expenses incurred by him on the consignment. This however can be changed by agreement between the two parties. (vi) It is also usual for the agent to give an advance to the principal in the form of cash or a bill of exchange. It is adjusted against the sale proceeds of the goods. 7.2 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India (vii) For his work the agent receives a commission, calculated on the basis of gross sale. For ordinary commission the agent is not responsible for any bad debt that may arise. If the agent is to be made responsible for bad debts, he is to be paid a commission called del- credere commission. It is calculated on total sales, not merely on credit sales until and unless agreed. (viii)Periodically, the agent sends to the principal a statement called Account Sales. It sets out the sales made by the agent, the expenses incurred on behalf of the principal, the commission earned by the agent and the balance due to the principal. (ix) Firms usually like to ascertain the profit or loss on each consignment or consignments to each agent. Consignment Account relates to accounts dealing with such business where one person sends goods to another person on the basis that such goods will be sold on behalf of and at the risk of the former. 2. DISTINCTION BETWEEN CONSIGNMENT AND SALE S.No. Consignment Sale 1. Ownership of the goods rests with the The ownership of the goods transfers consignor till the time they are sold by the with the transfer of goods from the seller consignee, no matter the goods are to the buyer. transferred to the consignee. 2. The consignee can return the unsold goods Goods sold are the property of the buyer to the consignor. and can be returned only if the seller agrees. 3. Consignor bears the loss of goods held It is the buyer who will bear the loss if with the consignee. any, after the delivery of goods. 4. The relationship between the consignor The relationship between the seller and and the consignee is that of a principal the buyer is that of a creditor and a and agent. debtor. 5. Expenses done by the consignee to receive Expenses incurred by the buyer are to be the goods and to keep it safely is borne by borne by the buyer itself after the delivery the consignor. of goods. 3. ACCOUNTING FOR CONSIGNMENT TRANSACTIONS AND EVENTS IN THE BOOKS OF THE CONSIGNOR For ascertaining profit or loss on any transaction (or series of transactions) there is one golden rule; open an account for the transaction (or series of transactions) and (i) put down the cost of goods and other expenses incurred or to be incurred on the debit side; and (ii) enter the sale proceeds as also the cost of goods remaining unsold on the right hand or the credit side. The difference between the total of the two sides will reveal profit or loss. There is profit if the credit side is more. FUNDAMENTALS OF ACCOUNTING 7.3 Copyright -The Institute of Chartered Accountants of India CONSIGNMENT We shall illustrate the scheme of entries on the basis of the following information: Illustration 1 Exe sent on 1st July, 2009 to Wye goods costing Rs. 50,000 and spent Rs. 1,000 on packing etc. On 3rd July, 2009, Wye received the goods and sent his acceptance to Exe for Rs. 30,000 payable at 3 months. Wye spent Rs. 2,000 on freight and cartage, Rs. 500 on godown rent and Rs. 300 on insurance. On 31st December, 2009 he sent his Account Sales (along with the amount due to Exe) showing that 4/5 of the goods had been sold for Rs. 55,000. Wye is entitled to a commission of 10%. One of the customers turned insolvent and could not pay Rs. 600 due from him. Show the necessary journal entries. Solution Journal Entries Dr. Cr. 1. Open Consignment Account and debit it with the Rs. Rs. cost of goods and credit it with "Goods sent on Con- signment Account". In the above case: 1/7/2009 Consignment to Wye A/c Dr. 50,000 To Goods Sent on Consignment A/c 50,000 2. For the expenses incurred by the consignor, debit Consignment Account and credit cash (or Bank as the case may be) 1/7/2009 Consignment to Wye A/c Dr. 1,000 To Bank A/c 1,000 3. If the consignee sends an advance, debit Cash (or Bank) or Bills Receivable and credit the consignee's personal account 3/7/2009 Bills Receivable A/c Dr. 30,000 To Wye 30,000 (Note: Wye's account has appeared only now, in the previous two entries his account did not figure since he is not personally involved) 4. Wye's acceptance will mature on 6/10/2009 Assuming it was met the entry will be: 6/10/2009 Bank A/c Dr. 30,000 To Bills Receivable A/c 30,000 (Note: If such bill is discounted by consignor with the bank before maturity, pass usual entry for discounting a bill. The discount on bills may either be treated as consignment expenses and charged to Consignment A/c or it may be treated as general financial charges and charged to Profit & Loss Account) 5. On receipt of Account sale (a) For sales made by the consignee, debit his personal account and credit Consignment Account Wye Dr. 55,000 To Consignment to Wye A/c 55,000 7.4 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India (b) For expenses incurred by the consignee as well as bad debts suffered by him on behalf of the consignor, debit Consignment Account and credit Consignee Account Consignment to Wye A/c Dr. 3,400 To Wye 3,400 (c) For commission due to the consignee, debit Consignment Account and credit the consignee. Consignment to Wye A/c 5,500 To Wye 5,500 (10% on Rs. 55,000) (d) For the remittance that may accompany the Account Sales, debit Bank and credit the consignee. Bank A/c Dr. 16,100 To Wye 16,100 6. For the goods that may remain unsold debit the Stock on Consignment Account and credit Consignment Account. Stock on Consignment A/c Dr. 10,600 To Consignment to Wye A/c 10,600 Note: (i) Cost of Stock 1/5 of Cost to consignor Rs. 10,000 1/5 of expense incurred Rs. 200 1/5 of freight Rs. 400 Rs. 10,600 (ii) Stock on Consignment Account is an asset; it will be shown in the balance sheet of the consignor and next year it will be transferred to the debit of the Consignment Account. 7. At this stage the Consignment Account will reveal profit or loss (see the account given below). The profit or loss will be transferred to the Profit and Loss Account by debit to the Consignment Account. Consignment to Wye A/c Dr. 5,700 To Profit and Loss A/c 5,700 8. The Goods sent on Consignment Account should be closed by transfer to the Trading Account debit the former and credit the latter: Goods sent on Consignment Account Dr. 50,000 To Trading Account 50,000 FUNDAMENTALS OF ACCOUNTING 7.5 Copyright -The Institute of Chartered Accountants of India CONSIGNMENT Important Ledger Accounts Consignment to Wye Account 2009 Rs. 2009 Rs. July 1 To Goods sent on Dec. 31 By Wye-sale Consignment A/c 50,000 proceeds 55,000 July 1 To Bank expenses 1,000 By Stock on Consignment Account 10,600 Dec. 31 To Wye-expenses & bad debt 3,400 Dec. 31 To Wye-commission 5,500 Dec. 31 To P&L Account-transfer of profit 5,700 65,600 65,600 Goods sent on consignment account 2009 Rs. 2009 Rs. Dec. 31 To Trading A/c 50,000 July 1 By Consignment to Wye A/c 50,000 Stock on consignment account 2009 Rs. 2009 Rs. Dec. 31 To Consignment to 10,600 Dec. 31 By Balance c/d 10,600 2010 Jan. 1 To Balance b/d 10,600 Wye's account 2009 Rs. 2009 Rs. Dec. 31 To Consignment July 3 By Bills Receivable Wye A/c 55,000 Account 30,000 By Consignment to Wye A/c – Expenses & bad debt 3,400 Commission 5,500 By Bank (balance received) 16,100 55,000 55,000 7.6 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India 4. VALUATION OF STOCK The principle is that stock should be valued at cost or net realisable value whichever is lower, the same principle as is practised for preparing final accounts. In the case of consignment, cost means not only the cost of the goods as such to the consignor but also all expenses incurred till the goods reach the premises of the consignee. Such expenses include packaging, freight, cartage, insurance in transit, octroi, etc. But expenses incurred after the goods have reached the consignee's godown (such as godown rent, insurance of godown, delivery charges) are not treated as part of the cost of purchase for valuing stock on hand. That is why in the case given above, stock has been valued ignoring godown rent and insurance. (Sometimes an examination problem states only that the consignor's expenses amounted to such and such amount and that consignee spent so much. If details are not available for valuing stock the expenses incurred by the consignor should be treated as part of cost while those incurred by the consignee should be ignored). If the expected selling price of stock on hand is lower than the cost, the value put on the stock should be expected net selling price only, i.e. expected selling price less delivery expenses, etc. 5. GOODS INVOICED ABOVE COST Sometimes the proforma invoice is made out at a value higher than the cost and entries in the books of the consignor are made out on that basis – even the stock remaining unsold will initially be valued on the basis of the invoice price. It must be remembered, however, that the profit or loss can be ascertained only if sale proceeds (plus) stock on hand, valued on cost basis, is compared with the cost of the goods concerned together with expenses. Hence, if entries are first made on invoice basis, the effect of the loading (i.e., amount added to arrive at the invoice price) must be removed by additional entries. Suppose in the example given above, if the invoice is cost plus 20%, i.e., Rs. 60,000 for the goods sent to Wye. The entries will be initially: Dr. Cr. Rs. Rs. (i) Consignment to Wye A/c Dr. 60,000 To Goods sent on Consignment A/c 60,000 (ii) Consignment to Wye A/c Dr. 1,000 To Bank 1,000 (iii) Bills Receivable A/c Dr. 30,000 To Wye 30,000 FUNDAMENTALS OF ACCOUNTING 7.7 Copyright -The Institute of Chartered Accountants of India CONSIGNMENT Dr. Cr. Rs. Rs. (iv) Bank A/c Dr. 30,000 To Bills Receivable A/c 30,000 (v) Wye Dr. 55,000 To Consignment to Wye A/c 55,000 (vi) Consignment to Wye A/c Dr. 3,400 To Wye 3,400 (vii) Consignment to Wye A/c Dr. 5,500 To Wye 5,500 (viii) Bank A/c Dr. 16,100 To Wye 16,100 (ix) Stock on Consignment A/c Dr. 12,600 To Consignment to Wye A/c 12,600 [1/5 of 60,000 + 1/5 of (1,000 + 2,000)] [Students will see that except for difference in the amounts in entries (i) and (ix), these and other entries are the same as those already given.] Additional entries (before ascertaining profit) to remove the effect of loading: (a) Goods sent on Consignment A/c Dr. 10,000 To Consignment to Wye A/c 10,000 [Entry (i) reversed to the extent of loading in order to debit the Consignment A/c on cost basis]. (b) Consignment to Wye A/c Dr. 2,000 To Stock Reserve Account 2,000 (The amount of loading included in the value of the closing stock is unrealised profit – hence reserve is created by debit to the Consignment Account). The Consignment Account will now reveal a profit of Rs. 5,700 the same as before. It will be transferred to the P&L A/c. Similarly entry given in 8 above will be made to transfer the balance in the Goods sent on Consignment Account (now against Rs. 5,000) after entry in (a) above to the credit of Trading Account. The accounts (except for Wye whose account will be the same as already shown) are given below: 7.8 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Consignment to Wye Account 2009 Rs. 2009 Rs. July 1 To Goods sent on Dec. 31 By Wye Consignment A/c 60,000 Sales proceeds 55,000 To Bank A/c – expenses 1,000 By Stock on Consignment A/c 12,600 Dec.31 To Wye-expenses & bad debt 3,400 " By Goods sent on " To Wye-commission 5,500 Consignment A/c loading 10,000 " To Stock Reserve A/c 2,000 " To Profit and Loss A/c transfer of profit 5,700 77,600 77,600 Goods sent on Consignment Account 2009 Rs. 2009 Rs. Dec. 31 To Consignment to Wye July 1 By Consignment to A/c – loading 10,000 Wye A/c 60,000 To Trading A/c – transfer 50,000 60,000 60,000 Stock Consignment Account 2009 Rs. 2009 Rs. Dec. 31 To Consignment to 12,600 Dec. 31 By Balance c/d 12,600 Wye A/c 2010 Jan. 1 Balance b/d 12,600 Stock Reserve Account 2009 Rs. 2009 Rs. Dec. 31 To Balance c/d 2,000 Dec. 31 By Consignment to 2,000 Wye A/c 2010 Jan. 1 By Balance b/d 2,000 FUNDAMENTALS OF ACCOUNTING 7.9 Copyright -The Institute of Chartered Accountants of India CONSIGNMENT The last two accounts will be carried forward to the next year and their balance will then be transferred to the Consignment Account – Rs. 12,600 on the debit side and Rs. 2,000 on the credit. This year in the balance sheet the net amount of Rs. 10,600 will be shown on the assets side as shown below: Rs. Stock on consignment 12,600 Less: Reserve 2,000 10,600 What would be the situation if the commission to Wye includes del-credere commission also? In that case Wye would be able to charge the bad debt of Rs. 600 to Exe; he will have to bear the loss himself. The student can see that then the profit on consignment will be Rs. 6,300. In this regard it is to be noted that when del – credere commission is paid to the consignee, the consignee account is debited in the books of consignor for both cash and credit sales. But if no such del – credere commission is paid then consignee account cannot be debited for credit sales and in that case the following entry is passed in the books of consignor for credit sales. Consignment Debtors A/c Dr. To Consignment A/c 6. ABNORMAL LOSS If any accidental or unnecessary loss occurs, the proper thing to do is to find out the cost of the goods thus lost and then to credit the Consignment Account and debit the Profit and Loss Account – this will enable the consignor to know what profit would have been earned had the loss not taken place. Suppose 1,000 sewing machines costing Rs. 250 each are sent on consignment basis and Rs. 10,000 are spent on freight etc. 20 machines are damaged beyond repair. The amount of loss will be: Cost = 20 × 250 Rs. 5,000 10,000 Expenses = 2 × Rs. 200 1,000 Rs. 5,200 This amount should be credited to the Consignment Account and debited to the P&L A/c. If any amount, say, Rs. 4,000 is received from the insurers, then debit to the P&L A/c will be only Rs. 1,200. But the credit to the Consignment Account will still be Rs. 5,200. Rs. 4,000 will have been debited to the Bank Account. Students will have noted that abnormal loss is valued just like stock in hand. Students should be careful while valuing goods lost in transit and goods lost in consignee's godown. Both are abnormal loss but in case of former consignee's non-recurring expenses are not to be included whereas it is to be included in case of latter. 7.10 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India 7. NORMAL LOSS If some loss is essential and unavoidable, it would be spread over the entire consignment while valuing stock. The total cost plus expenses incurred should be divided by the quantity available after the normal loss to ascertain the cost per unit. Suppose 1,000 kg of apples are consigned to a wholesaler, the cost being Rs. 3 per kg, plus Rs. 400 of freight. It is concluded that a loss of 15% is unavoidable. The cost per kg will be Rs. 3,400 ÷850 or Rs. 4. If the stock is 100 kg its value will be Rs. 400. 8. COMMISSION Commission is the remuneration paid by the consignor to the consignee for the services rendered to the former for selling the consigned goods. Three types of commission can be provided by the consignor to the consignee, as per the agreement, either simultaneously or in isolation. They are: 8.1 ORDINARY COMMISSION The term commission simply denotes ordinary commission. It is based on fixed percentage of the gross sales proceeds made by the consignee. It is given by the consignor regardless of whether the consignee is making credit sales or not. This type of commission does not give any protection to the consignor from bad debts and is provided on total sales. 8.2 DEL-CREDERE COMMISSION To increase the sale and to encourage the consignee to make credit sales, the consignor provides an additional commission generally known as del-credere commission. This additional commission when provided to the consignee gives a protection to the consignor against bad debts. In other words, after providing the del-credere commission, bad debts is no more the loss of the consignor. It is calculated on total sales unless there is any agreement between the consignor and the consignee to provide it on credit sales only. 8.3 OVER-RIDING COMMISSION It is an extra commission allowed by the consignor to the consignee to promote sales at higher price then specified or to encourage the consignee to put hard work in introducing new product in the market. Depending on the agreement it is calculated on total sales or on the difference between actual sales and sales at invoice price or any specified price. 9. RETURN OF GOODS FROM THE CONSIGNEE Consigned goods can be returned by the consignee because of many reasons like poor quality or not upto the specimen or destroyed in transit etc. In such a situation, the question arises is the valuation of returned goods. Consigned goods returned by the consignee to the consignor are valued at the price at which it was consigned to the consignee. Expenses incurred by the consignee to send those goods back to the consignor are not taken into consideration while valuing it because only those expenses are included in the cost of goods which help to bring the goods into present location and condition i.e. the saleable condition. FUNDAMENTALS OF ACCOUNTING 7.11 Copyright -The Institute of Chartered Accountants of India CONSIGNMENT 10. ACCOUNT SALES An account sale is the periodical summary statement sent by the consignee to the consignor. It contains details regarding – (a) sales made, (b) expenses incurred on behalf of the consignor, (c) commission earned, (d) unsold stock left with the consignee, (e) advance payment or security deposited with the consignor and the extent to which it has been adjusted, (f) balance payment due or remitted. It is a summary statement and is different from Sales Account. 11. ACCOUNTING BOOKS OF THE CONSIGNEE The consignee is not concerned when goods are consigned to him or when the consignor incurs expenses. He is concerned only when he sends an advance to the consignor, makes a sale, incurs expenses on the consignment and earns his commission. He debits or credits the consignor for all these as the case may be. Illustration 2 Exe sent on 1st July, 2006 to Wye goods costing Rs. 50,000 and spent Rs. 1,000 on packing etc. On 3rd July, 2006, Wye received the goods and sent his acceptance to Exe for Rs. 30,000 payable at 3 months. Wye spent Rs. 2,000 on freight and cartage, Rs. 500 on godown rent and Rs. 300 on insurance. On 31st December, 2006 he sent his Account Sales (along with the amount due to Exe) showing that 4/5 of the goods had been sold for Rs. 55,000. Wye is entitled to a commission of 10%. One of the customers turned insolvent and could not pay Rs. 600 due from him. Show the necessary journal entries in the consignee's book. Solution 1. On sending the acceptance to Exe Dr. Cr. Rs. Rs. 2006 July 3, Exe Dr. 30,000 To Bills Payable A/c 30,000 2. On meeting expenses on the consignment: 2006 July 3, Exe Dr. 2,000 To Bank 2,000 3. On meeting his acceptance: 2006 Oct. 6, Bills payable Dr. 30,000 To Bank 30,000 7.12 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India 4. On sales being effected: Sundry Debtors/Bank Dr. 55,000 To Exe 55,000 5. On there being a bad debt: Exe Dr. 600 To Sundry Debtors 600 6. On earning the commission: Exe Dr. 5,500 To Commission Earned A/c 5,500 7. On setting the account to Exe: Exe Dr. 16,100 To Bank 16,100 If the commission includes del-credere commission also, he would not be able to debit Exe for the bad debt. In that case the debit should be to the Commission Earned Account whose net balance will then be Rs. 4,900 and he will have to pay Rs. 16,700 to Exe. 12. ADVANCE BY THE CONSIGNEE VS SECURITY AGAINST THE CONSIGNMENT Generally the consignor insist the consignee for some advance payment for the goods consigned at the time of delivery of goods. This advance payment is adjusted in full against the amount due by the consignee on account of the goods sold. But if the advance money deposited by the consignee is in the form of security against the goods consigned then the full amount is not adjusted against the amount due by the consignee to the consignor on account of goods sold in case, there is any unsold stock left with the consignee. In that case proportionate security in respect of unsold goods is carried forward till the time the respective goods held with the consignee are sold. An overview of the consignment transaction between consignee and consignor can be depicted with the help of the following chart : FUNDAMENTALS OF ACCOUNTING 7.13 Copyright -The Institute of Chartered Accountants of India CONSIGNMENT Consignment Account Goods consigned Consignor Consignee Account sales Stock of consignor Details of Sales made by the consignee Expenses incurred on behalf of the consignor Commission earned Unsold stock left with the consignee Advance payment or security deposited Balance due or remitted Illustration 3 Miss Rakhi consigned 1,000 radio sets costing Rs. 900 each to Miss Geeta, her agent on 1st July, 2006. Miss Rakhi incurred the following expenditure on sending the consignment. Freight Rs. 7,650 Insurance Rs. 3,250 Miss Geeta received the delivery of 950 radio sets. An account sale dated 30th November, 2006 showed that 750 sets were sold for Rs. 9,00,000 and Miss Geeta incurred Rs. 10,500 for carriage. Miss Geeta was entitled to commission 6% on the sales effected by her. She incurred expenses amounting to Rs. 2,500 for repairing the damaged radio sets remaining in the stock. Miss Rakhi lodged a claim with the insurance company which was admitted at Rs. 35,000. Show the Consignment Account and Miss Geeta's Account in the books of Miss Rakhi. 7.14 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Solution In the books of Miss Rakhi Consignment Account Rs. Rs. Rs. To Goods sent on By Miss Geeta 9,00,000 Consignment A/c 9,00,000 By Insurance Co. 35,000 By Profit & Loss A/c To Cash abnormal loss 10,545 Freight 7,650 By Consignment Insurance 3,250 10,900 stock 1,84,391 To Miss Geeta Carriage 10,500 Repairs 2,500 Commission 54,000 67,000 To Profit & Loss A/c 1,52,036 11,29,936 11,29,936 Miss Geeta’s Account Rs. Rs. Rs. To Consignment A/c (Sales) 9,00,000 By Consignment A/c Expenses: Carriage 10,500 Repairs 2,500 Commission 54,000 67,000 By Bank 8,33,000 9,00,000 9,00,000 Note: It is assumed that the agent has remitted the amount due from her. Working Notes: 1. Abnormal loss : Cost to the consignor: 50 sets @ Rs. 900 45,000 Add. Proportionate expenses incurred by the consignor 50 x 10,900 545 1,000 45,545 Less: Insurance claim 35,000 10,545 2. Valuation of Stock 200 sets @ Rs. 900 1,80,000 Add: Proportionate expenses of the consignor 200 x 10,900 2,180 1,000 FUNDAMENTALS OF ACCOUNTING 7.15 Copyright -The Institute of Chartered Accountants of India CONSIGNMENT 200 x 10,500 Carriage and customs duty paid by the consignee 2,211 950 1,84,391 Illustration 4 Vikram Milk Foods Co. Ltd. of Vikrampur sent to Sunder Stores, Sonepuri 5,000 kgs of baby food packed in 2,000 tins of net weight 1 kg and 6,000 packets of net weight 1/2 kg for sale on consignment basis. The consignee's commission was fixed at 5% of sale proceeds. The cost price and selling price of the product were as under: 1 kg. tin 1/2 kg. packet Rs. Rs. Cost Price 10 6 Selling Price 15 7 The consignment was booked on freight "To Pay" basis, and freight charges came to 2% of selling value. One case containing 501 kg. tins was lost in transit and the transport carrier admitted a claim of Rs. 450. At the end of the first half-year, the following information is gathered from the "Account Sales" sent by the consignee: (i) Sale proceeds: 1,500 1 kg. tins 4,000 1/2 kg. packets (ii) Store rent and insurance charges Rs. 600. Find out the value of closing stock on consignment. Show the Consignment A/c and the Consignee's A/c in the books of Vikram Milk Food Co. Ltd. assuming that the consignees had paid the amount due from them. Solution Vikram Milk Foods Co. Ltd. Consignment to Sonepuri Account Dr. Cr. Rs. Rs. Rs. To Goods sent on By Sunder Stores Consignment A/c 1,500 1 kg. tins 22,500 2,000 1 kg. tins 20,000 4,000 1/2 kg. pkts. 28,000 50,500 6,000 1/2 kg. pkts. 36,000 56,000 To Sunder Stores: By Insurance (Claim) 450 Freight 1,440 By Profit & Loss A/c Rent and insurance 600 abnormal loss 65 Commission 2,525 4,565 By Stock A/c 16,915 To Profit & Loss A/c Profit 7,365 67,930 67,930 7.16 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Sunder Stores, Sonepuri Rs. Rs. To Consignment to Sonepuri By Consignment to Account - Sales Proceeds 50,500 Sonepuri Account Freight 1,440 Rent & Insurance 600 Commission 2,525 By Bank 45,935 50,500 50,500 Working Notes: (i) Sale value of total consignment: 2,000 1 kg. tins 30,000 6,000 1/2 kg. pkts. 42,000 72,000 (ii) Freight @ 2% of above 1,440 (iii) Stock at the end: 450 1 kg. tins @ Rs. 10 (Selling Price Rs. 6,750) 4,500 2,000 1/2 kg. pkts. @ Rs. 6 (Selling Price Rs. 14,000) 12,000 16,500 Add: Freight 2% of (Selling Price Rs. 20,750) 415 16,915 (iv) Loss in transit: Cost of 50 1 kg. tins @ Rs. 10 500 Freight @ 2% of Selling Price Rs. 750 15 Less : Claim 515 450 Loss 65 FUNDAMENTALS OF ACCOUNTING 7.17 Copyright -The Institute of Chartered Accountants of India CONSIGNMENT Illustration 5 Vandana Traders of Delhi purchased 10,000 pieces of Sarees @ Rs. 100 per Saree. Out of these Sarees, 6,000 Sarees were sent on consignment to Vastralaya of Jabalpur at the selling price of Rs. 120 per Saree. The consignors paid Rs. 3,000 for packaging and freight. Vastralaya sold 5,000 Sarees at Rs. 125 per Saree and incurred Rs. 1,000 for selling expenses and remitted Rs. 5,00,000 to Delhi on account. They are entitled to a commission of 5% on total sales plus a further 20% commission on any surplus price realised over Rs. 120 per Saree. 3,000 Sarees were sold at Rs. 110 per Saree. Owing to fall in market price, the value of the stock of Sarees in hand is to be reduced by 10%. Prepare the Consignment Account and Trading Account in the books of Vandana Traders and their account in the books of the agents Messrs Vastralaya of Jabalpur. Solution Vandana Traders, Delhi Consignment Account Rs. Rs. To Goods sent on Consignment 7,20,000 By Vastrayala (Sales) 6,25,000 To Bank (expenses) 3,000 By Goods Sent on To Vastrayala - Expenses 1,000 Consignment (Loading) 1,20,000 - Commission 36,250 By Stock out on To Stock Reserve 18,000 Consignment 1,08,450 To Net Profit 75,200 8,53,450 8,53,450 Trading Account for the period ending.... Rs. Rs. To Purchases 10,00,000 By Sales 3,30,000 Less: Goods on By Closing Stock 90,000 Consignment 6,00,000 By Profit on Consignment 75,200 4,00,000 To Net Profit 95,200 4,95,200 4,95,200 7.18 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Vastralaya, Jabalpur Vandana Traders (Delhi) Account Rs. Rs. To Bank (Expenses) 1,000 By Bank/Sundry Debtors 6,25,000 To Commission 36,250 To Bank 5,00,000 To Balance c/d 87,750 6,25,000 6,25,000 Working Notes: Rs. (1) Commission payable 5% on Rs. 6,25,000 31,250 20% on Rs. 25,000 5,000 36,250 (2) The closing stock will be 1,000 Sarees @ Rs. 120 = 1,20,000 ⎡ ⎤ 1,000 Add : Proportionate expenses ⎢Rs.3,000x ⎥ 500 ⎣ 6,000⎦ 1,20,500 Less : 10% reduction due to fall in market price 12,050 Consignment Stock (at loaded amount) 1,08,450 Loading = Rs. 20 × 1,000 - 10% = 20,000 - 2,000 = Rs. 18,000 (3) It is better to transfer profit on consignment to profit and loss account instead of trading account. Illustration 6 Shri Mehta of Bombay consigns 1,000 cases of goods costing Rs. 100 each to Shri Sundaram of Madras. Shri Mehta pays the following expenses in connection with consignment: Rs. Carriage 1,000 Freight 3,000 Loading charges 1,000 Shri Sundaram sells 700 cases at Rs. 140 per case and incurs the following expenses: Clearing charges 850 Warehousing and storage 1,700 Packing and selling expenses 600 It is found that 50 cases have been lost in transit and 100 cases are still in transit. Shri Sundaram is entitled to a commission of 10% on gross sales. Draw up the Consignment Account and Sundaram's Account in the books of Shri Mehta. FUNDAMENTALS OF ACCOUNTING 7.19 Copyright -The Institute of Chartered Accountants of India CONSIGNMENT Solution In the books of Shri Mehta Consignment of Madras Account Dr. Cr. Rs. Rs. To Goods sent on By Sundaram (Sales) 98,000 Consignment 1,00,000 By Loss in Transit To Bank (Expenses) 5,000 50 cases @ Rs. 105 each 5,250 To Sundaram (Expenses) 3,150 To Sundaram (Commission) 9,800 By Consignment Stock To Profit on Consignment to Profit & Loss A/c 11,700 In hand 150 @ Rs. 106 each 15,900 In transit 100 @ Rs. 105 each 10,500 26,400 1,29,650 1,29,650 Sundaram's Account Rs. Rs. To Consignment to Madras A/c 98,000 By Consignment A/c (Expenses) 3,150 By Consignment A/c (Commission) 9,800 By Balance c/d 85,050 98,000 98,000 Working Notes: (i) Consignor's expenses on 1,000 cases amounts to Rs. 5,000; it comes to Rs. 5 per case. The cost of cases lost will be computed at Rs. 105 per case. (ii) Sundaram has incurred Rs. 850 on clearing 850 cases, i.e., Re. 1 per case; while valuing closing stock with the agent Re. 1 per case has been added to cases in hand with the agent. Illustration 7 Ajay of Mumbai consigned to Vijay of Delhi, goods to be sold at invoice price which represents 125% of cost. Vijay is entitled to a commission of 10% on sales at invoice price and 25% of any excess realised over invoice price. The expenses on freight and insurance incurred by Ajay were Rs. 10,000. The account sales received by Ajay shows that Vijay has effected sales amounting to Rs. 1,00,000 in respect of 75% of the consignment. His selling expenses to be reimbursed were Rs. 8,000. 10% of consignment goods of the value of Rs. 12,500 were destroyed in fire at the Delhi godown and the insurance company paid Rs. 12,000 net of salvage. Vijay 7.20 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India remitted the balance in favour of Ajay. Prepare consignment account and the account of Vijay in the books of Ajay alongwith the necessary calculations. Solution Books of Ajay Consignment Account Dr Cr. Rs Rs To Goods sent on 1,25,000 By Goods sent on 25,000 Consignment A/c Consignment A/c To Cash A/c 10,000 By Abnormal Loss 11,000 To Vijay 8,000 By Vijay 1,00,000 (Expenses) (Sales) To Vijay 10,937.50 By Stock on 20,250 (Commission) Consignment A/c To Stock Reserve A/c 3,750 By General Profit & Loss A/c 1,437.50 1,57,687.50 1,57,687.50 Vijay's Account Dr Cr. Rs. Rs. To Consignment A/c 1,00,000.00 By Consignment A/c 8,000.00 To Abnormal Loss A/c 12,000.00 By Consignment A/c 10,937.50 By Bank A/c 93,062.50 1,12,000.00 1,12,000.00 Working Notes: 1. Calculation of value of goods sent on consignment: Abnormal Loss at Invoice price = Rs. 12,500. Abnormal Loss as a percentage of total consignment = 10%. Hence the value of goods sent on consignment = Rs. 12,500 X 100/ 10 = Rs. 1,25,000. Loading of goods sent on consignment = Rs. 1,25,000 X 25/125 = Rs. 25,000. FUNDAMENTALS OF ACCOUNTING 7.21 Copyright -The Institute of Chartered Accountants of India CONSIGNMENT 2. Calculation of abnormal loss (10%): Abnormal Loss at Invoice price = Rs. 12,500. Abnormal Loss at cost = Rs. 12,500 X 100/125 = Rs. 10,000 Proportionate expenses of Ajay (10 % of Rs 10,000) = Rs. 1,000 Rs. 11,000 3. Calculation of closing stock (15%): Ajay's Basic Invoice price of consignment = Rs. 1,25,000 Ajay's expenses on consignment = Rs. 10,000 Rs. 1,35,000 Value of closing stock = 15% of Rs. 1,35,000 = Rs. 20,250 Loading in closing stock = Rs. 18,750 X 25/125 = Rs. 3,750 Where Rs. 18,750 (15% of Rs. 1,25,000) is the basic invoice price of the goods sent on consignment remaining unsold. 4. Calculation of commission: Invoice price of the goods sold = 75% of Rs. 1,25,000 = Rs. 93,750 Excess of selling price over invoice price = Rs. 6,250 ( Rs. 1,00,000- Rs. 93,750) Total commission = 10% of Rs. 93,750 + 25% of Rs. 6,250 = Rs. 9,375 + Rs. 1,562.50 = Rs. 10,937.50 Illustration 8 X of Delhi purchased 10,000 metres of cloth for Rs. 2,00,000 of which 5,000 metres were sent on consignment to Y of Agra at the selling price of Rs. 30 per metre. X paid Rs. 5,000 for freight and Rs. 500 for packing etc. Y sold 4,000 metre at Rs. 40 per metre and incurred Rs. 2,000 for selling expenses. Y is entitled to a commission of 5% on total sales proceeds plus a further 20% on any surplus price realised over Rs. 30 per metre. 3,000 metres were sold at Delhi at Rs. 30 per metre less Rs. 3,000 for expenses and commission. Owing to fall in market price, the stock of cloth in hand is to be reduced by 10%. Prepare the Consignment Account and Trading and Profit & Loss Account in Books of X. 7.22 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Solution In the books of Mr. X Consignment Account Dr. Cr. Particulars Amount Particulars Amount Rs. Rs. To Goods sent on Consignment Account 1,50,000 By Y's account: Sales 1,60,000 By Goods sent on consignment 50,000 To Bank account: (cancellation of loading) Freight and packing etc. 5,500 By Stock on consignment (W.N.2) 27,000 To Y's account: Selling expenses 2,000 Commission (W.N.1) 16,000 To Stock Reserve (W.N.2) 9,000 To Profit and loss account (profit on consignment transferred) 54,500 2,37,000 2,37,000 Trading and Profit and Loss Account for the year ended…….. Dr. Cr. Particulars Amount Particulars Amount Rs. Rs. To Purchases 2,00,000 By Sales 90,000 To Gross profit c/d 26,000 By Goods sent on consignment 1,00,000 By Stock in hand Cost Rs. 40,000 Less: 10% 4,000 36,000 2,26,000 2,26,000 To Expenses and commission 3,000 By Gross profit b/d 26,000 To Net profit 77,500 By Consignment A/c (profit on consignment) 54,500 80,500 80,500 FUNDAMENTALS OF ACCOUNTING 7.23 Copyright -The Institute of Chartered Accountants of India CONSIGNMENT Working Notes: 1. Calculation of commission payable to Y: Rs. Total sale proceeds of Y 1,60,000 Surplus proceeds realised over Rs. 30 per metre [4,000 x Rs. (40-30)] 40,000 Commission: 5% of total sale proceeds (5% of Rs. 1,60,000) 8,000 20% of surplus (20% of Rs. 40,000) 8,000 16,000 2. Stock on Consignment: Rs. Cost of consignment stock (1000 mtrs@ Rs. 20) 20,000 Less: Reduction of 10% due to fall in market price 2,000 18,000 Add: Loading 50% 9,000 27,000* * Proportionate expenses incurred by the consignor have not been added to the cost of consignment stock as it has been valued at lower of cost or realisable value. SELF EXAMINATION QUESTIONS Choose the most appropriate answer from the given options: 1. P of Delhi sends out 100 boxes of toothpaste costing Rs 200 each. Each box consist of 12 packets. 60 boxes were sold by consignee at Rs 20 per packet. Amount of sale value will be: (a) Rs. 14,400 (b) Rs. 12,000 (c) Rs.13,200 (d)Rs. 14,200 2. X of Kolkata sends out 2,000 boxes to Y of Delhi costing Rs 100 each. Consignor’s expenses Rs. 5,000. 1/10th of the boxes were lost in consignee’s godown and treated as normal loss. 1,200 boxes were sold by consignee. The value of consignment stock will be: (a) Rs. 68,333 (b) Rs. 61,500 (c) Rs. 60,000 (d)Rs. 60,250 3. Goods costing Rs. 2,00,000 sent out to consignee at Cost + 25%. Invoice value of the goods will be: (a) Rs. 2,50,000 (b) Rs. 2,40,000 (c) Rs. 3,00,000 (d)None 4. Goods costing Rs 1,80,000 sent out to consignee to show a profit of 20% on Invoice Price. Invoice price of the goods will be: (a) Rs.2,16,000 (b) Rs.2,25,000 (c) Rs.2,10,000 (d) None 7.24 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India 5. Goods of the Invoice value Rs 2,40,000 sent out to consignee at 20% profit on cost. The loading amount will be: (a) Rs. 40,000 (b) Rs. 48,000 (c) Rs. 50,000 (d)None 6. X sent out certain goods to Y of Delhi. 1/10 of the goods were lost in transit. Invoice value of goods lost Rs 12,500. Invoice value of goods sent out on consignment will be: (a) Rs. 1,20,000 (b) Rs. 1,25,000 (c) Rs. 1,40,000 (d)Rs. 1,00,000 7. Rabin consigned goods for the value of Rs. 8,250 to Raj of Kanpur and paid freight etc. of Rs. 650 and insurance Rs. 400. He drew a bill on Raj for 3 months after date for Rs. 3,000 as an advance against consignment, and discounted the bill for Rs. 2,960. Further, he received Account Sales from Raj showing that, part of the goods had realized gross Rs. 8,350 and that his expenses and commission amounted to Rs 870. The stock unsold was valued at Rs 2750. Consignee wants to remit a draft for the amount due. The amount of draft will be: (a) Rs. 2,130 (b) Rs. 4,480 (c) Rs. 5,130 (d) Rs. 5,090 8. X of Kolkata sends out goods costing Rs. 1,00,000 to Y of Delhi. 3/5th of the goods were sold by consignee for Rs. 70,000. Commission 2% on sales plus 20% of gross sales less all commission exceeds cost price. The amount of Commission will be: (a) Rs. 2,833 (b) Rs. 2,900 (c) Rs. 3,000 (d)Rs. 2,800 9. X of Kolkata send out 1,000 bags to Y of Delhi costing Rs. 200 each. Consignor’s expenses Rs. 2,000. Y’s expenses non-selling Rs 1000, selling Rs. 2000. 100 bags were lost in transit. Value of lost in transit will be: (a) Rs. 20,200 (b) Rs. 20,300 (c) Rs. 20,000 (d) Rs. 23,000 10. X of Kolkata sends out 1,000 bags to Y of Delhi costing Rs. 2,000 each. 600 bags were sold at 10% above cost price. Sales value will be: (a) Rs. 13,20,000 (b) Rs. 13,00,000 (c) Rs. 12,00,000 (d)13,50,000 11. Which of the following statement is not true: (a) If del-credere commission is allowed, bad debt will not be recorded in the books of consignor (b) If del-credere commission is allowed, bad debt will be debited in consignment account (c) Del-credere commission is allowed by consignor to consignee (d) Del-credere commission is generally relevant for credit sales 12. X of Kolkata sends out 400 bags to Y of Delhi costing Rs. 200 each. Consignor expenses Rs. 2,000. Y’s non selling expenses Rs. 2,000 and selling expenses Rs. 1,000. 300 bags were sold by Y. Value of consignment stock will be: (a) Rs. 20,400 (b) Rs. 20,200 (c) Rs. 20,000 (d)Rs. 21,000 13. X of Kolkata sent out 2,000 boxes costing 100 each with the instruction that sales are to be made at cost + 45%. X draws a bill on Y for an amount equivalent to 60% of sales value. FUNDAMENTALS OF ACCOUNTING 7.25 Copyright -The Institute of Chartered Accountants of India CONSIGNMENT The amount of bill will be: (a) Rs.1,74,000 (b) Rs.2,00,000 (c) Rs.2,90,000 (d) Rs.1,20,000 14. Which of the following statement is wrong: (a) Consignor is the owner of the consignment stock (b) Del-credere commission is allowed by consignor to protect himself from bad debt (c) Proportionate consignor’s expenses is added up with consignment stock (d) All proportionate consignee’s expenses will be added up for valuation of consignment stock. 15. X of Kolkata sends out 500 bags to Y costing Rs 400 each at an invoice price of Rs 500 each. Consignor’s expenses Rs 4,000 consignee’s non-selling expenses Rs. 1,000 and selling expenses Rs. 2,000. 400 bags were sold. The amount of consignment stock at Invoice Price will be: (a) Rs. 50,900 (b)Rs. 50,800 (c) Rs. 50,000 (d)Rs. 51,000 16. X of Kolkata sends out 500 bags to Y costing Rs 400 each at an invoice price of Rs 500 each. Consignor’s expenses Rs 4,000 consignee’s, non-selling expenses Rs. 1000, selling expenses Rs. 2,000. 400 bags were sold. The amount of Stock Reserve will be (a) Rs. 10,000 (b) Nil (c) Rs. 20,000 (d) Rs. 20,400 17. Commission will be shared by: (a) Consignor & Consignee (b) Only Consignee (c) Only Consignor (d) Third Party 18. X of Kolkata sends out certain goods to Y of Mumbai at cost + 25%. 1/2 of the goods received by Y is sold at 1,76,000 at 10% above invoice price. Invoice value of goods send out is: (a) Rs. 300,000 (b) Rs. 3,20,000 (c) Rs. 180,000 (d)Rs. 340,000 19. X of Kolkata sends out goods costing Rs. 3,00,000 to Y of Mumbai at cost + 25%. Consignor’s expenses Rs. 5,000. 1/10th of the goods were lost in transit. Insurance claim received Rs. 3,000. The net loss on account of abnormal loss is: (a) Rs. 27,500 (b) Rs. 25,500 (c) Rs. 30,500 (d) Rs. 27,000 20. Rahim of Kolkata sends out 1,000 boxes to Ram of Delhi costing Rs. 100 each at an invoice price of Rs. 120 each. Goods send out on consignment to be credited in general trading will be: (a) Rs. 1,00,000 (b) Rs. 1,20,000 (c) Rs. 20,000 (d)None 21. In the books of consignor, the profit of consignment will be transferred to: (a) General Trading A/c (b)General P/L A/c (c)Drawings A/c (d)None of these 22. Ram of Kolkata sends out 1,000 boxes to Y of Delhi, costing Rs 200 each. 1/10th of the boxes were lost in transit. 2/3rd of the boxes received by consignee is sold at cost + 25%. The amount of sales value will be: (a) Rs.1,00,000 (b) Rs.1,50,000 (c) Rs.1,20,000 (d)Rs.1,40,000 7.26 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India 23. X of Kolkata sends out goods costing Rs 80,000 to Y of Mumbai so as to show 20% profit on invoice value. 3/5th of the goods received by consignee is sold at 5% above invoice price. The amount of sales value will be: (a) Rs.63,000 (b) Rs.60,000 (c) Rs.50,400 (d)Rs.40,000 24. X of Kolkata sends out certain goods at cost + 25%. Invoice value of goods sends out Rs 200,000. 4/5th of the goods were sold by consignee at Rs.1,76,000. Commission 2% upto invoice value and 10% of any surplus above invoice value. The amount of commission will be: (a) Rs.4,800 (b) Rs.5,200 (c) Rs.3,200 (d)Rs.1,600 25. Ram of Kolkata sends out goods costing Rs. 1,00,000 to Y of Mumbai at 20% profit on invoice price. 1/10th of the goods were lost in transit. ½ of the balance goods were sold. The amount of stock reserve on consignment stock will be: (a) Rs.4,500 (b) Rs.9,000 (c) Rs.11,250 (d)None 26. C of Bangalore consigned goods costing Rs. 3,000 to his agent at Delhi. Freight and insurance paid by consignor Rs 100. Consignee’s expenses Rs 200. 4/5th of the goods were sold for Rs. 3,000. Commission 2% on sales. Consignee want to settle the balance with the help of a bank draft. The amount of draft will be: (a) Rs.2,740 (b) Rs.2,800 (c) Rs.3,000 (d) Rs.1,800 27. Out of the following at which point the treatment of “Sales” and “Consignment” is same: (a) Ownership transfer. (b) Money receive. (c) Stock outflow. (d)Risk. 28. If del-credere commission is allowed for bad debt, consignee will debit the bad debt amount to: (a) Commission Earned A/c (b) Consignor’s A/c (c) Debtors A/c (d) General Trading A/c 29. A proforma invoice is sent by: (a) Consignee to Consignor (b) Consignor to Consignee (c) Debtors to Consignee (d) Debtors to Consignor 30. Which of the following statement is correct: (a) Consignee will pass a journal entry in his books at the time of receiving goods from consignor. (b) Consignee will not pass any journal entry in his books at the time of receiving goods from consignor. (c) The ownership of goods will be transferred to consignee at the time of receiving the goods. (d) Consignee will treat consignor as creditor at the time of receiving goods. FUNDAMENTALS OF ACCOUNTING 7.27 Copyright -The Institute of Chartered Accountants of India CONSIGNMENT 31. 1,000 kg of apples are consigned to a wholesaler, the cost being Rs 3 per kg plus Rs 400 of freight, it is known that a loss of 15% is unavoidable. The cost per kg will be: (a) Rs 5 (b) Rs 4 (c) Rs 3.40 (d) Rs 3 32. A of Mumbai sold goods to B of Delhi, the goods are to be sold at 125% of cost which is invoice price. Commission 10% on sales at invoice price and 25% of any surplus realized above invoice price. 10% of the goods sent out on consignment, invoice value of which is Rs. 12,500 were destroyed. 75% of the total consignment is sold by B at Rs. 1,00,000. What will be the amount of commission payable to B? (a) Rs.10,937.50 (b) Rs.10,000 (c) Rs.9,000 (d)Rs.9,700 33. Consignment A/c is prepared in the books of : (a) Consignor (b) Consignee (c) Third Party (d)None 34. Goods sent on consignment Invoice value Rs. 2,00,000, at cost + 331/3 %. 1/5th of the goods were lost in transit. Insurance claim received Rs. 10,000. The amount of abnormal loss to be transferred to General P/L is: (a) Rs.30,000 (b) Rs.20,000 (c) Rs.35,000 (d)Rs.25,000 35. X of Kolkata sends out 100 boxes to Y of Delhi costing Rs. 200 each. Consignor’s expenses Rs. 4,000. Consignee’s non-selling expenses Rs. 900 and selling expenses Rs. 500. 1/10th of the boxes were lost in transit. 2/3rd of the boxes received by consignee were sold. The amount of consignment stock will be: (a) Rs.7,200 (b) Rs.7,500 (c) Rs.7,000 (d) Rs.6,000 36. X of Kolkata sends out goods costing Rs. 1,00,000 to Y of Mumbai at cost + 25%. Consignor’s expenses Rs. 2,000. 3/5th of the goods were sold by consignee at Rs. 85,000. Commission 2% on sales + 20% of gross sales less all commission exceeds invoice value. Amount of commission will be: (a) Rs.3,083 (b) Rs.3,000 (c) Rs.2,500 (d)Rs.2,000 37. Consignment stock will be recorded in the balance sheet of consignor on asset side at: (a) Invoice Value (b) At Invoice value less stock reserve (c) At lower than cost price (d) At 10% lower than invoice value 38. Which of the following expenses of consignee will be considered as non-selling expenses: (a) Advertisement (b) Insurance (c) Selling Expenses (d) None of the above 39. The consignment accounting is made on the following basis: (a) Accrual (b) Realisation (c) Cash Basis (d)None 40. Goods sent on consignment Rs. 7,60,000. Opening consignment stock Rs. 48,000. Cash sales Rs. 7,00,000. Consignor’s expenses Rs. 20,000. Consignee’s expenses Rs. 12,000. 7.28 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Commission Rs. 20,000. Closing consignment stock Rs. 3,00,000. The profit on consignment is: (a) Rs.1,50,000 (b) Rs.1,40,000 (c) Rs.92,000 (d) None 41. X of Kolkata sends out 100 boxes to Y of Delhi costing Rs 100 each. Consignor’s expenses Rs. 1,000. Consignee’s selling expenses Rs. 500. 3/5th of the goods sold by consignee, ½ of the balance goods were lost in consignee’s godown due to fire. The value of abnormal loss will be: (a) Rs.3,000 (b) Rs.2,200 (c) Rs.4,000 (d)None 42. X of Kolkata sends out 1000 boxes costing Rs. 200 each to Y of Delhi. 1/10th of the boxes were lost in transit. 2/3rd of the remaining boxes sold by consignee at cost + 25%. The sale value will be: (a) Rs.1,50,000 (b) Rs.1,40,000 (c) Rs.1,20,000 (d)Rs.1,00,000 43. Which of the following item is not credited to consignment account? (a) Cash sales made by consignee (b) Credit sales made by consignee (c) Consignment Stock (d) Stock Reserve on closing consignment stock. 44. Goods sent out on consignment Rs. 2,00,000. Consignor’s expenses Rs. 5,000. Consignee’s expenses Rs. 2,000. Cash sales Rs. 1,00,000, credit sales Rs. 1,10,000. Consignment stock Rs. 40,000. Ordinary commission payable to consignee Rs. 3,000. Del-credere commission Rs. 2,000. The amount irrecoverable from customer Rs. 2,000. What will be the profit on consignment? (a) Rs.38,000 (b) Rs.40,000 (c) Rs.36,000 (d)Rs.43,000 45. The commission received from consignor will be transferred to which account? (a) General Trading (b) General P/L (c) Balance Sheet (d)None of these 46. X of Kolkata sends out 1,000 boxes to Y of Delhi costing Rs. 20 each. Consignor’s expenses Rs. 2,000. 4/5th of the boxes were sold at Rs. 25 each. The profit on consignment will be: (a) Rs.2,400 (b) Rs.2,000 (c) Rs.3,000 (d)Rs.3,500 47. If del-credere commission is allowed by consignor to consignee the bad debt treatment in the books of Consignor will be: (a) Will not be recorded in consignor’s books (b) Bad Debt will be debited in Consignor’s A/c (c) Bad Debt will be charged to General P/L A/c (d) Bad Debt will be recoverable along with credit sales FUNDAMENTALS OF ACCOUNTING 7.29 Copyright -The Institute of Chartered Accountants of India CONSIGNMENT 48. The owner of the consignment stock is: (a) Consignor (b) Consignee (c) Debtors (d)None 49. The nature of the consignment account is: (a) Capital in nature (b) Nominal in nature (c) Realisation A/c in nature (d) Bank A/c in nature 50. Rahim of Kolkata sends out goods of the invoice value Rs 2,00,000 to Ram of Delhi at cost + 25%. The amount of loading will be: (a) Rs.50,000 (b) Rs.40,000 (c) Rs.30,000 (d)Rs.60,000 51. Goods sent to consignment at cost + 331/3 %. The percentage of loading on invoice price will be: (a) 25% (b) 331/3 % (c) 20% (d) None 52. The balance of goods sent out on consignment will be transferred to: (a) General P/L (b)General Trading (c) Balance Sheet (d)Capital A/c 53. X of Kolkata purchased 1,000 boxes costing Rs. 100 each. 200 boxes were sent out to Y of Delhi at cost + 25%. 600 boxes were sold at 120 each. The amount of gross profit to be recorded in general trading account will be: (a) Rs.12,000 (b) Rs.17,000 (c) Rs. (3,000) (d)None 54. In the books of consignee, the profit on consignment will be transferred to: (a) General Trading A/c (b) General Profit and Loss A/c (c) Drawings A/c (d) None of the above 55. P of Faridabad sent out goods costing Rs. 45,000 to Y of Delhi at cost + 331/3 %. 1/10th of goods were lost in transit. 2/3rd of the goods are sold at 20% above invoice price. The amount of sale value will be: (a) Rs.54,000 (b) Rs.43,200 (c) Rs.60,000 (d)Rs.36,000 56. M of Kolkata sent out goods costing Rs. 45,000 to N of Mumbai at cost + 331/3 %. 1/10th of goods were lost in transit. 2/3rd of the goods are sold at 20% above invoice price. ½ of the sales are on credit. The amount of credit sales will be: (a) Rs.21,600 (b) Rs.18,000 (c) Rs.21,000 (d)Rs.22,500 57. A of Ahmedabad sent out certain goods so as to show a profit of 20% on invoice price. 1/10th of the goods were lost in transit. The cost price of goods lost is Rs.20,000. The invoice value of goods sent out is: (a) Rs.2,50,000 (b) Rs.2,00,000 (c) Rs.2,25,000 (d)Rs.2,40,000 7.30 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India 58. Ram of Delhi sends out goods costing Rs.2,00,000 to Krishna of Brindaban. Consignor’s expenses Rs.5,000. Consignee’s expenses in relation to sales Rs. 2,000. 4/5th of the goods were sold at 20% above cost. The profit on consignment will be: (a) Rs.26,000 (b) Rs.32,000 (c) Rs.26,200 (d)Rs.(6,000) 59. Over-riding commission is a commission payable to consignee by consignor for: (a) For protecting himself from bad debt (b) For making sales above specific price (c) As good friend (d) As loyalty payment 60. A of Kolkata sends out 500 boxes to B of Delhi costing Rs. 200 each. Consignor’s expenses Rs. 5,000. 1/5th of the boxes were still in transit. 3/4th of the goods received by consignee, were sold. The amount of goods still in transit will be: (a) Rs.20,000 (b) Rs.21,000 (c) Rs.21,200 (d)None 61. Consignment account is (a) Real account (b) Personal account (c) Nominal account (d) None of the above 62. In the books of consignor, the loss on consignment business will be charged to: (a) Consignee A/c (b) General Trading A/c (c) General P/L A/c (d) Bank A/c 63. Dravid of Delhi sends out goods to Sourav of Kolkata, goods costing Rs 2,00,000 at cost + 25%, with the instruction to sell it at cost + 50%. If 4/5th of the goods are sold at stipulated selling price and commission allowable 2% on sales. What will be the profit on consignment in the books of consignor? (a) Rs.86,200 (b) Rs.70,000 (c) Rs. 75,200 (d)Rs. 76,800 64. X of Kolkata sends out goods costing Rs 3,00,000 to Y of Delhi. Goods are to be sold at cost + 331/3 %. The consignor asked consignee to pay an advance for an amount equivalent to 60% of sales value. The amount of advance will be: (a) Rs.2,40,000 (b) Rs.2,00,000 (c) Rs.3,00,000 (d)None 65. If consignor draws a bill on consignee and discounted it with the banker the discounting charges will be debited in: (a) General P/L (b) Consignment A/c (c) Consignee (d)Debtors FUNDAMENTALS OF ACCOUNTING 7.31 Copyright -The Institute of Chartered Accountants of India CONSIGNMENT 66. X of Kolkata sends out goods costing Rs. 3,00,000 to Y of Delhi. Commission agreement – 2% on sales + 3% on sales as del-credere commission. The entire goods is sold by consignee for Rs 4 lacs. However, consignee is able to recover Rs. 3,95,000 from the debtors. The amount of profit to be transferred to P/L as net commission by consignee will be: (a) Rs.15,000 (b) Rs.22,000 (c) Rs.21,000 (d)Rs.20,000 ANSWERS 1. (a) 2. (a) 3. (a) 4. (b) 5. (a) 6. (b) 7. (b) 8. (a) 9. (a) 10. (a) 11. (b) 12. (d) 13. (a) 14. (d) 15. (d) 16. (a) 17. (b) 18. (b) 19. (a) 20. (a) 21. (b) 22. (b) 23. (a) 24. (a) 25. (c) 26. (a) 27. (c) 28. (a) 29. (b) 30. (b) 31. (b) 32. (a) 33. (a) 34. (b) 35. (b) 36. (a) 37. (b) 38. (b) 39. (a) 40. (b) 41. (b) 42. (a) 43. (d) 44. (a) 45. (b) 46. (a) 47. (a) 48. (a) 49. (b) 50. (b) 51. (a) 52. (b) 53. (a) 54. (d) 55. (b) 56. (a) 57. (a) 58. (a) 59. (b) 60. (b) 61. (c) 62. (c) 63. (c) 64. (a) 65. (b) 66. (a) 7.32 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India CHAPTER - 7 ACCOUNTING FOR SPECIAL TRANSACTIONS Unit 2 Joint Ventures Copyright -The Institute of Chartered Accountants of India JOINT VENTURES Learning Objectives: After studying this unit, you will be able to : (cid:2) Understand special features of joint venture transactions, (cid:2) Learn the techniques of preparing Joint Venture Account and also the settlement of accounts with the co-venturer(s), (cid:2) Familiarise with the use of Memorandum Joint Venture Account, (cid:2) Learn the technique of deriving venture profit and its allocation among the venturers, (cid:2) Distinguish joint venture with partnership. 1. MEANING OF JOINT VENTURE A Joint Venture is a very short duration "business" (generally, confined to a single transaction, like, buying some surplus stores and selling them) entered into by two or more persons jointly. Joint Venture may be described as a temporary partnership between two or more persons without the use of the firm name, for a limited purpose. In other words, under Joint Venture, two or more persons agree to undertake a particular venture (e.g. Joint consignment of goods, Joint construction of a building, Joint underwriting of a particular issue of shares or debentures) and to share the profits and losses thereof in an agreed ratio (if agreement is silent on this point, then in equal ratio). Venture may be for the construction of a building or a bridge, for the supply of certain quantity of materials or labour and even for the supply of technical services. The persons who have so agreed to undertake a Joint Venture are known as 'Joint Venturers' or 'Co-Venturers'. If the co-venturers are in business, then they often supply goods from their regular business for the venture. This limited partnership automatically expires on the completion of the venture for which it was formed. Let us take two examples to appreciate the nature of joint venture business. Example 1: A and B decided to purchase Assam Teak in Guwahati and send to Delhi. A of Guwahati purchased Teak of Rs. 1,00,000, spent Rs. 20,000 for transportation and Rs. 8,000 for transit insurance. B of Delhi received the goods. B spent Rs. 2,000 for unloading, Rs. 6,000 for godown rent and Rs. 4,000 for selling expenses. He sold the entire lot for Rs. 1,75,000. They agreed to share profit of the venture in the ratio of A:B = 3:2. In the above example, A and B are co-venturers. The venture was for sale of a certain quantity of Assam Teak. The venture would be over on sale of such Teak. Obviously some accounting is necessary to find out profit/loss of the venture and settlement of claims of the co-venturers. Example 2: Mr. Arun and Barun entered into a joint venture for supply of 15,000 pcs. of Bengal handloom sarees to an exporter of Delhi @ Rs. 520 per piece. Arun and Barun contacted handloom weavers and paid advance to them. They collected production by lots and delivered to Delhi in a lot of 1,000 pcs. 7.34 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India In this example, Arun and Barun were co-venturers. The venture was for a special purpose of supplying of 15,000 pcs. of Bengal handloom sarees. The venture was over on supply of such quantity. Obviously, Arun and Barun had to maintain accounts to book all costs relating to the venture and revenue received from the exporter for determining profit/loss of the venture and for settling the claims of co-venturers inter se. 2. FEATURES OF JOINT VENTURE ACCOUNT Some important features of joint venture business are as follows: (i) It is short duration special purpose partnership. Parties in venture are called co-venturers. (ii) Co-venturers may contribute funds for running the venture or supply stock from their regular business. (iii) Co-venturers share profit/loss of the venture at an agreed ratio likewise partnership. (iv) Generally profit/loss of the venture is computed on completion of the venture. (v) Going concern assumption of accounting is not appropriate for joint venture accounting. There does not arise problem of distinction between capital and revenue expenditure. Plant, machinery and other fixed assets when used in venture are first charged to venture account at cost. On completion of venture such assets are revalued and shown as revenue of the venture. Thus, accounting approach for measurement of venture profit is totally different. 3. DISTINCTION OF JOINT VENTURE ACCOUNT WITH PARTNERSHIP Joint Venture differs from Partnership in the following respects: Basis of Distinction Joint Venture Partnership 1. Scope It is limited to a specific venture. It is not limited to a specific venture. 2. Persons involved The persons carrying on business The persons carrying on business are called co-venturers. are called partners. 3. Ascertainment of The profits/losses are ascertained The profits/losses are ascertained profit/loss at the end of specific venture (if on an annual basis. venture continues for a short period) or on interim basis annually (if venture continues for a longer period). 4. Act governing No specific Act is there. Partnership firms are governed by the Indian Partnership Act, 1932. 5. Name There is no need for firm name. A partnership firm always has a name. FUNDAMENTALS OF ACCOUNTING 7.35 Copyright -The Institute of Chartered Accountants of India JOINT VENTURES 6. Separate set of There is no need for a separate set Separate set of books have to be Books of books. The accounts can be maintained. maintained even in one of the Co- venturer's books only. 7. Admission of A minor cannot be a co-venturer A minor can be admitted to the Minor as he is incompetent to contract. benefits of the firm. 8. Accounting Accounting for joint venture is Accounting for partnership is done on liquidation basis. done on going concern basis. 9. Competition It is a rule rather than exception Partners generally do not involve that chances of co-venturers in the in competing business. competing business are very high. 4. METHODS OF MAINTAINING JOINT VENTURE ACCOUNTS Co-venturers can maintain the accounts for joint venture in the manner that suits them in a particular situation. Generally there are two ways to keep records of joint venture: 1. When separate set of books are maintained. 2. When no separate set of books are maintained. Maintenance of Joint Venture Accounts Separate set of books are maintained No separate set of books are maintained Joint bank Joint venture Personal accounts When each When each account account of co-venturers co-venturer co-venturer keeps keeps record of record of own all transactions transactions only Joint venture Co-venturer’s Memorandum Joint venture account account joint venture with co-venturer account account 7.36 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India 4.1. WHEN SEPARATE SET OF BOOKS ARE MAINTAINED When size of the venture is fairly big, the co-venturers keep separate set of books of account for the joint venture. Joint venture transactions are separate from their regular business activities. In the books of Joint Venture the following accounts are opened: (i) Joint Bank Account. (ii) Joint Venture Account. (iii) Personal Accounts of the Co-venturers or Co-venturers' Accounts. (i) Joint Bank Account: The co-venturers open a separate bank account for the venture transactions by making initial contributions. The bank account is generally operated jointly. Expenses are met from this Joint Bank Account. Also sales or collections from transactions are deposited to this account. However, sometimes the co-venturers may make direct payments and direct collections. On completion of the venture the Joint Bank Account is closed by paying the balance to co-venturers. (ii) Joint Venture Account: This account is prepared for measurement of venture profit. This account is debited for all venture expenses and is credited for all sales or collections. Venture profit/loss is transferred to co-venturers' accounts. (iii) Co-venturers' Accounts: Personal accounts of the venturers are maintained to keep record of their contributions of cash, goods or meeting venture expenditure directly and direct payment received by them on venture transactions. This account is also closed simultaneously with the closure of joint bank account. The following journal entries are necessary in the books of joint venture: Journal Entries (a) For initial contribution by the co-venturers in Joint Bank Account Joint Bank A/c Dr. To Co-venturers' A/c (b) For expenses paid out of Joint Bank Account Joint Venture A/c Dr. To Joint Bank A/c (c) For material supplied by venturers or direct payment made by venturers Joint Venture A/c Dr. To Co-venturers' A/cs (d) For sale or payment received Joint Bank A/c Dr. To Joint Venture A/c (e) For sale or payment received directly by the venturers Co-venturers' A/cs Dr. To Joint Venture A/c (f) For profit on Joint Venture Joint Venture A/c Dr. To Co-venturers' A/cs or For loss on Joint Venture Co-venturers' A/cs Dr. To Joint Venture A/c (g) For closing the Joint Bank A/c Co-venturers' A/cs Dr. To Joint Bank A/c FUNDAMENTALS OF ACCOUNTING 7.37 Copyright -The Institute of Chartered Accountants of India JOINT VENTURES Illustration 1 B and C enter a joint venture to prepare a film for the Government. The Government agrees to pay Rs. 1,00,000. B contributes Rs. 10,000 and C contributes Rs. 15,000. These amounts are paid into a Joint Bank Account. Payments made out of the joint bank account were: Rs. Purchase of equipment 6,000 Hire of equipment 5,000 Wages 45,000 Materials 10,000 Office expenses 5,000 B paid Rs. 2,000 as licensing fees. On completion, the film was found defective and Government made a deduction of Rs. 10,000. The equipment was taken over by C at a valuation of Rs. 2,000. Separate books were maintained for the joint venture whose profits were divided in the ratio of B-2/5 and C-3/5. Give ledger accounts. Solution Dr. Cr. Joint Bank Account Date Rs. Date Rs. ?? To B 10,000 ?? By Joint Venture A/c- ?? To C 15,000 Equipment 6,000 Hire of equipment 5,000 ?? To Joint Venture A/c 90,000 Wages 45,000 Materials 10,000 Office expenses 5,000 ?? By B 19,600 By C 24,400 1,15,000 1,15,000 7.38 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Dr. Cr. Joint Venture Account Date Rs. Date Rs. ?? To Joint Bank A/c: ?? By Joint Bank A/c Equipment 6,000 (Rs. 1,00,000-10,000) 90,000 Hire of equipment 5,000 Wages 45,000 ?? By C Materials 10,000 (Equipment taken) 2,000 Off. Expenses 5,000 ?? To B - Licensing fee 2,000 ?? To Profit to: B 2/5 7,600 C 3/5 11,400 19,000 92,000 92,000 B’s Account Date Rs. Date Rs. ?? To Joint Bank A/c ?? By Joint Bank A/c 10,000 - Repayment 19,600 ?? By Joint Venture A/c 2,000 - Fees ?? By Joint Venture A/c 7,600 - Profit 19,600 19,600 C’s Account Date Rs. Date Rs. ?? To Joint Venture A/c ?? By Joint Bank A/c 15,000 - Equipment 2,000 ?? To Joint Bank A/c ?? By Joint Venture A/c - Repayment 24,400 - Profit 11,400 26,400 26,400 FUNDAMENTALS OF ACCOUNTING 7.39 Copyright -The Institute of Chartered Accountants of India JOINT VENTURES 4.2 WHEN NO SEPARATE SET OF BOOKS ARE MAINTAINED When no separate set of books of account are maintained for joint venture, each venturer maintains accounts independently for the venture transactions. The standard practice is to keep full records of own transactions as well as transactions of the co-venturer relating to the venture. But sometimes the parties to a venture keep record of their own transactions only. In that case a Memorandum Joint Venture Account is prepared by the parties. 4.2.1 WHEN EACH CO-VENTURER KEEPS RECORDS OF ALL TRANSACTIONS When venturers maintain full records of joint venture, the following journal entries are necessary: Journal Entries (i) For supply of goods to venture out of business stock Joint Venture A/c Dr. To Purchase A/c (ii) For meeting expenses of venture Joint Venture A/c Dr. To Bank A/c (iii) When co-venturer supplies goods and incurs expenses for venture Joint Venture A/c Dr. To Co-venturer A/c (iv) For venture sale Bank A/c Dr. To Joint Venture A/c (v) For venture sale made by the co-venturer Co-venturer A/c Dr. To Joint Venture A/c (vi) For venture profit Joint Venture A/c Dr. To Profit and Loss A/c (for own shares) To Co-venturer A/c (for co-venturer's share) (vii) For venture loss Profit and Loss A/c Dr. (for own share) Co-venturer A/c Dr. (for co-venturer's share) To Joint Venture A/c (viii) For settlement of claims When payment is due to co-venturer Co-venturer A/c Dr. To Bank A/c When payment is due from co-venturer Bank A/c Dr. To Co-venturer A/c 7.40 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India So two special ledger accounts are necessary for joint venture transactions in the books of a venturer: (i) Joint Venture Account and (ii) Co-venturer's A/c. Illustration 2 A and B entered into a joint venture of underwriting the subscription of the entire share capital of the Copper Mines Ltd. consisting of 1,00,000 equity shares of Rs. 10 each and to pay all expenses upto allotment. The profits were to be shared by them in proportions of 3/5ths and 2/5ths. The consideration in return for this agreement was the allotment of 12,000 other shares of Rs. 10 each to be issued to them as fully paid. A provided funds for registration fees Rs. 12,000, advertising expenses of Rs. 11,000, for expenses on printing and distributing the prospectus amounting to Rs. 7,500 and other printing and stationery expenses of Rs. 2,000. B contributed towards payment of office rent Rs. 3,000, legal charges Rs. 13,750, salary to clerical staff Rs. 9,000 and other petty disbursements of Rs. 1,750. The prospectus was issued and applications fell short by 15,000 shares. A took over these on joint account and paid for the same in full. The venturers received the 12,000 fully paid shares as underwriting commission. They sold their entire holding at Rs. 12.50 less 50 paise brokerage per share. The net proceeds were received by A for 15,000 shares and B for 12,000 shares. Write out the necessary accounts in the books of A showing the final adjustments. Solution In the books of A Joint Venture Account Dr. Cr. Rs. Rs. To Bank A/c - Registration Fee 12,000 By Bank A/c - sale proceeds of - Advertising 11,000 15,000 shares Rs. 12.50 each - Printing & Distribution less 50 paise brokerage 1,80,000 of Prospectus 7,500 By B - sale proceeds of 12,000 - Printing & Stationery 2,000 shares Rs. 12.50 each less 1,44,000 ToB - Office Rent 3,000 50 paise per share brokerage - Legal Charges 13,750 - Clerical Staff 9,000 - Petty Payments 1,750 ToBank - Cost of Shares 1,50,000 Net profit to: - P & L A/c [3/5] 68,400 - B [2/5] 45,600 3,24,000 3,24,000 FUNDAMENTALS OF ACCOUNTING 7.41 Copyright -The Institute of Chartered Accountants of India JOINT VENTURES B's Account Rs. Rs. To Joint Venture A/c - Sale By Joint Venture A/c proceeds of shares 1,44,000 - Office Rent 3,000 - Legal Charges 13,750 - Clerical Staff 9,000 - Petty Payments 1,750 By Joint Venture A/c - share of profit 45,600 By Bank 70,900 1,44,000 1,44,000 Illustration 3 With the information given in Illustration 2, let us prepare the necessary accounts in the books of B also. In the books of B Joint Venture Account Rs. Rs. To Bank - Office Rent 3,000 By Bank (Sale of Investments) 1,44,000 - Legal Charge 13,750 - Clerical Staff 9,000 By A (Sale of Investments) 1,80,000 - Petty Payments 1,750 ToA - Registration Fee 12,000 - Advertisement 11,000 - Printing of Prospectus 7,500 - Printing Stationery 2,000 - Cost of Shares 1,50,000 ToNet Profit to: P&L A/c (2/5) 45,600 A (3/5) 68,400 3,24,000 3,24,000 7.42 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India A's Account Rs. Rs. To Joint Venture A/c By Joint Venture A/c sale proceeds 1,80,000 - Registration Fee 12,000 To Bank A/c 70,900 - Advertisement Charges 11,000 - Printing & Distribution of - Prospectus 7,500 - Printing & Stationery 2,000 - Cost of Shares 1,50,000 By Joint Venture A/c - share of profit 68,400 2,50,900 2,50,900 Illustration 4 A and B entered into a joint venture agreement to share the profits and losses in the ratio of 2:1. A supplied goods worth Rs. 60,000 to B incurring expenses amounting to Rs. 2,000 for freight and insurance. During transit goods costing Rs. 5,000 became damaged and a sum of Rs. 3,000 was recovered from the insurance company. B reported that 90% of the remaining goods were sold at a profit of 30% of their original cost. Towards the end of the venture, a fire occurred and as a result the balance stock lying unsold with B was damaged. The goods were not insured and B agreed to compensate A by paying in cash 80% of the aggregate of the original cost of such goods plus proportionate expenses incurred by A. Apart from the share of profit of the joint venture, B was also entitled under the agreement to a commission of 5% of net profits of joint venture after charging such commission. Selling expenses incurred by B totalled Rs. 1,000. B had earlier remitted an advance of Rs. 10,000. B duly paid the balance due to A by Bank Draft. You are required to prepare in A's books: (i) Joint Venture Account. (ii) B's Account. Solution In the books of A Joint Venture Account Particulars Amount (Rs.) Particulars Amount (Rs.) To Purchases (Cost of goods supplied) 60,000 By Bank (Insurance claim) 3,000 To Bank (Expenses) 2,000 By B (Sales) 64,350 To B (Expenses) 1,000 By B (agreed value To B (Commission - 1/21 of Rs. 8,896) 424 for damaged goods) 4,546 To Profit transferred to: Profit & Loss A/c 5,648 B 2,824 71,896 71,896 FUNDAMENTALS OF ACCOUNTING 7.43 Copyright -The Institute of Chartered Accountants of India JOINT VENTURES B's Account Particulars Amount (Rs.) Particulars Amount (Rs.) To Joint Venture A/c (Sales) 64,350 By Bank (Advance) 10,000 To Joint Venture A/c (Claim Portion) 4,546 By Joint Venture A/c (Expenses) 1,000 By Joint Venture A/c (Commission) 424 By Joint Venture A/c (Share of Profit) 2,824 By Bank (Balance received) 54,648 68,896 68,896 Working Notes: 1. It has been assumed that the goods damaged in transit have no residual value. 2. Computation of Sales: Rs. Cost of goods sent 60,000 Less: Cost of damaged goods 5,000 55,000 Less: Cost of goods remaining unsold 5,500 Cost of goods sold 49,500 Add: Profit @ 30% 14,850 Sales 64,350 3. Claim for loss of fire admitted by B Cost of goods 5,500 Add: Proportionate expenses (2,000 x 5,500)/60,000 183 5,683 Less: 20% 1,137 4,546 Illustration 5 Ram and Rahim enter into a joint venture to take a building contract for Rs. 24,00,000. They provide the following information regarding the expenditure incurred by them: Ram Rahim Rs. Rs. Materials 6,80,000 5,00,000 Cement 1,30,000 1,70,000 Wages - 2,70,000 Architect's fees 1,00,000 - License fees - 50,000 Plant - 2,00,000 7.44 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Plant was valued at Rs. 1,00,000 at the end of the contract and Rahim agreed to take it at that value. Contract amount Rs. 24,00,000 was received by Ram. Profits or losses to be shared equally. You are asked to show: Joint Venture Account and Rahim's Account in the books of Ram. Solution In the books of Ram Joint Venture Account Dr. Cr. Rs. Rs. To Bank A/c: By Bank A/c 24,00,000 Material 6,80,000 By Rahim's A/c (plant) 1,00,000 Cement 1,30,000 Architect's fee 1,00,000 9,10,000 To Rahim's A/c: Material 5,00,000 Cement 1,70,000 Wages 2,70,000 License fees 50,000 Plant 2,00,000 11,90,000 To Net profit transferred to Rahim's A/c 2,00,000 Profit & Loss A/c 2,00,000 4,00,000 25,00,000 25,00,000 Rahim's Account Dr. Cr. Rs. Rs. To Joint Venture A/c (plant) 1,00,000 By Joint Venture A/c (sundries) 11,90,000 To Bank A/c 12,90,000 By Joint Venture A/c (profit) 2,00,000 13,90,000 13,90,000 FUNDAMENTALS OF ACCOUNTING 7.45 Copyright -The Institute of Chartered Accountants of India JOINT VENTURES Illustration 6 With the information given in illustration 5, prepare Joint Venture Account and Ram's Account in the books of Rahim. In the books of Rahim Joint Venture Account Dr. Cr. Rs. Rs. To Ram’s A/c: By Ram's A/c (contract amount) 24,00,000 Material 6,80,000 By Plant A/c 1,00,000 Cement 1,30,000 Architect's fee 1,00,000 9,10,000 To Bank A/c: Material 5,00,000 Cement 1,70,000 Wages 2,70,000 License fees 50,000 Plant 2,00,000 11,90,000 To Net profit transferred to: Ram's A/c 2,00,000 Profit & Loss A/c 2,00,000 4,00,000 25,00,000 25,00,000 Ram's Account Dr. Cr. Rs. Rs. To Joint Venture A/c (contract 24,00,000 By Joint Venture A/c (sundries) 9,10,000 amount) By Joint Venture A/c (profit) 2,00,000 By Bank A/c 12,90,000 24,00,000 24,00,000 7.46 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India 4.2.2 WHEN EACH CO-VENTURER KEEPS RECORDS OF THEIR OWN TRANSACTIONS ONLY Sometimes the venturers find it useless to keep full record of venture transactions. Rather it is considered convenient to keep record of own transactions only. For this purpose, it is necessary to open 'Joint Venture with Co-venturer A/c'. All expenses incurred, materials sent, etc. are debited to this account. Profit earned is also debited to this account while the loss sustained is credited. Any receipt from joint venture or from co-venturer is credited to this account, while any payment to the co-venturer is debited to this account, profit/loss on joint venture cannot be determined from this account. For determination of profit/loss a Memorandum Joint Venture Account is prepared. Venturers usually pass the following journal entries: Journal Entries (a) For supply of material from stores: Joint Venture with X A/c Dr. To Purchases A/c (b) For payment of expenses Joint Venture with X A/c Dr. To Bank/Cash A/c (c) For sale on venture Bank A/c Dr. To Joint Venture with X A/c (d) For profit on venture Joint Venture with X A/c Dr. To Profit & Loss A/c (e) For final payment to co-venturer Joint Venture with X A/c Dr. To Bank A/c or For final payment made by co-venturer Bank A/c Dr. To Joint Venture with X A/c 4.2.2.1 Memorandum Joint Venture Account It is a rough statement prepared by the venturers for determination of venture profit when they do not maintain full records of venture transactions in the books of accounts. Unless this memorandum account is prepared, the venturer cannot compute venture profit. Let us now take some illustrations to understand the book keeping system of joint venture, when venturers maintain records of their own transactions only. FUNDAMENTALS OF ACCOUNTING 7.47 Copyright -The Institute of Chartered Accountants of India JOINT VENTURES Illustration 7 Ram and Gautham entered into a joint venture to buy and sell TV sets, on 1st July, 2009. On 1.7.2009, Ram sent a draft for Rs. 2,50,000 in favour of Gautham, and on 4.7.2009, the latter purchased 200 sets each at a cost of Rs. 2,000 each. The sets were sent to Ram by lorry under freight "to pay" for Rs. 2,000 and were cleared by Ram on 15.7.2009. Ram effected sales in the following manner: Date No. of sets Sale price Discount per set sales price 16.7.2009 20 3,000 10% 31.7.2009 100 2,800 - 15.8.2009 80 2,700 5% On 25.8.2009, Ram settled the account by sending a draft in favour of Gautham, profits being shared equally. Gautham does not maintain any books. Show in Ram's book: (i) Joint Venture with Gautham A/c; and (ii) Memorandum Joint Venture A/c. Solution Ram's Books Joint Venture with Gautham A/c Dr. Cr. 2009 Rs. 2009 Rs. July 1 To Bank - draft sent July 16 By Bank-sale proceeds 54,000 on A/c 2,50,000 July 15 To Bank - freight 2,000 July 31 By Bank-sale proceeds 2,80,000 " 25 To Profit and Loss A/c share of profit 68,600 Aug 14 By Bank-sale proceeds 2,05,200 To Bank - draft sent in settlement 2,18,600 5,39,200 5,39,200 Memorandum Joint Venture A/c Rs. Rs. To Cost of 200 sets 4,00,000 By Sales proceeds (net) " Freight 2,000 20 sets @ Rs. 2,700 net 54,000 " Profit : 100 sets @ Rs. 2,800 net 2,80,000 Ram 68,600 80 sets @ Rs. 2,565 net 2,05,200 Gautham 68,600 1,37,200 5,39,200 5,39,200 7.48 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Illustration 8 D of Delhi and B of Mumbai entered into a joint venture for the purpose of buying and selling second-hand typewriters, B to make purchases and D to effect sales. The profit and loss was to be shared equally by D and B. A sum of Rs. 15,000 was remitted by D to B towards the venture. B purchased 22 old typewriters for Rs. 15,000 and paid Rs. 9,000 for their reconditioning and sent them to Delhi. His other expenses were: Buying commission Rs. 1,000; Cartage Rs. 200 and Miscellaneous Rs. 100. D took delivery of the typewriters and paid Rs. 270 for Octroi and Rs. 100 for Cartage. He sold 12 typewriters at Rs. 2,200 each; 4 typewriters at Rs. 2,100 each and 3 typewriters at Rs. 2,000 each. He retained remaining typewriters for his personal use at an agreed value of Rs. 1,500. His other expenses – Insurance Rs. 250; Rent Rs. 400; Brokerage Rs. 1,200 and Miscellaneous Rs. 200. Each party's ledger contains a record of his own transactions on account of joint venture. Prepare a statement showing the result of the venture and the account of the venturer in D's ledger as it will finally appear, assuming that the matter was finally settled between the parties. Solution Statement showing the results of the venture Sales Rs. Rs. 12 typewriters @ Rs. 2,200 each 26,400 4 " " Rs. 2,100 each 8,400 3 " " Rs. 2,000 each 6,000 Taken by D at agreed value 1,500 42,300 Less:Paid for purchases 15,000 Repairs 9,000 Expenses – Buying Commission 1,000 Cartage (200 + 100) 300 Misc. Expenses (200 + 100) 300 Octroi 270 Insurance 250 Rent 400 Brokerage 1,200 27,720 Profit on Joint Venture 14,580 FUNDAMENTALS OF ACCOUNTING 7.49 Copyright -The Institute of Chartered Accountants of India JOINT VENTURES In the books of D Joint Venture with B Account Rs. Rs. To Cash - remittance to B 15,000 By Cash - Sale proceeds received 40,800 To Cash - expenses - Octroi 270 By Drawings (Goods taken for - Cartage 100 personal use) 1,500 - Insurance 250 - Rent 400 - Brokerage 1,200 - Misc. 200 2,420 To Profit and Loss - own share of profit (1/2) 7,290 To Cash - Balance remitted 17,590 42,300 42,300 Illustration 9 David of Mumbai and Khosla of Delhi entered into a joint venture for the purpose of buying and selling second-hand motor cars: David to make purchases and Khosla to effect sales. The profit and loss was to be shared equally. Khosla remitted a sum of Rs. 1,50,000 to David towards the venture. David purchased 5 cars for Rs. 1,60,000 and paid Rs. 60,000 for their reconditioning and sent them to Delhi. He also incurred an expense of Rs. 5,000 in transporting the cars to Delhi. Khosla sold 4 cars for Rs. 2,40,000 and retained the fifth car for himself at an agreed value of Rs. 50,000. His expenses were: Insurance Rs. 1,000; Garage Rent Rs. 2,000; Brokerage Rs. 2,000; and Sundry Expenses Rs. 400. Each party's ledger contains a record of his own transactions on account of joint venture. Prepare a Memorandum Joint Venture Account showing the result of the venture and the joint venture account with David in the books of Khosla as it will appear, assuming that the matter was finally settled between the parties. 7.50 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India