 Hello, and welcome to the session in which you would look at consignment arrangement as part of the revenue recognition process. In a consignment arrangement, we have two parties. We have a consignor and a consignee. For the purpose of this illustration, we're going to assume that PepsiCo is the consignor and Walmart is the consignee. Who is the consignor? It's the party that transferred the goods, not the title to the consignee. Simply put, PepsiCo will transfer, physically transfer their product and replace their product in Walmart's store for resale. Although they place their product in Walmart's store where Walmart has physical possession, the titles never did not change. PepsiCo still have the title for its own product. So the consignor PepsiCo will retain its title. PepsiCo places the goods for resale. Simply put, all what's happening here, you can look at it as an arrangement to rent the shelf. So all what Walmart providing is the space, giving PepsiCo the space shelves to place their product. Once goods are sold, Walmart will submit the proceeds from the sale minus a commission as their avenue for Walmart. So nothing will happen, really. No sale will take place until Walmart sells the product to a third party, to a customer. Walmart will take a small commission and will submit the proceeds remaining to PepsiCo. So PepsiCo will only recognize the revenue when the goods are sold to a third party. And what we mean by third party here is someone other than Walmart because Walmart did not buy the product from PepsiCo. Because if the product are not sold, simply put, Walmart will return the product to PepsiCo and there is no sale for PepsiCo. So PepsiCo will have to wait until a customer walks into Walmart, buys the product and walks out. Now, who's the consignee? Well, we said the consignee is Walmart. The consignee accept the transfer of the goods but not the title. Although they possess the physical inventory, that inventory cannot be counted as part of Walmart's inventory. So simply put, when Walmart counts their inventory, they cannot count PepsiCo product as part of their inventory. And Walmart's will make a commission, which is this is when they recognize the revenue, when they make the sale. And when they make the sale, also PepsiCo will make the sale as well. So in a sense, Walmart will take title for a few seconds when the person walks with the product, give it to the cashier, the cashier scan it. In that split second, Walmart takes title, sells it, then give the proceeds back to PepsiCo. It doesn't happen automatically. I mean, it does, it could happen automatically in a software system, but we're not going to assume it's going to happen automatically. Actually, we're going to look at an example to see how this process worked by using journal entries. But before we look at journal entries and an example, I would like to remind you whether you are a student or a CPA candidate to take a look at my website farhatlectures.com. I don't replace your CPA review course. I don't replace your accounting courses. My motto is saving accounting students and CPA candidates one at a time by providing new resources, lectures, multiple choice, true false questions that's going to help you understand the material better and do better on your exam. This is a list, a partial list of my accounting courses. My CPA material is aligned with your Becker, Roger, Gleam, Wiley, Miles, or any other CPA review course. I give you access to 1500. Previously, AI-CPA released questions with detailed solution. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation. Like this recording, share it with others. It helps me tremendously connect with me on Instagram, Facebook, Twitter, Reddit, and I just started a CPA exam support group on GroupMe. Please join us. Let's take a look at this example to illustrate sales on consignment or consignment arrangement. Let's assume PepsiCo ship product costing $360,000 on consignment to Walmart. Well, that's what happened first. PepsiCo pays $20,000 of freight sales, so they pay $20,000 to get the product to Walmart. Walmart, from their part, they're going to pay $5,000 in advertising costs to promote PepsiCo product. However, the advertisement cost will be reimbursed by PepsiCo. By the end of the period, Walmart sold two-third of the consigned merchandise, two-third of $360,000 for $320,000 in cash. Then Walmart notifies PepsiCo of the sales, retired 10% commission, and sends the cash proceeds to PepsiCo. So let's take a look at the journal entries step by step. From the shipment of goods from PepsiCo to Walmart. When we ship the goods, PepsiCo will debit an account called inventory consignment, and they will credit finished goods. They're basically both inventory, all what they're indicating here, that the inventory left PepsiCo warehouse, and now it's part of our inventory of PepsiCo inventory, but it's on consignment in Walmart. What would Walmart do under those circumstances? Basically no entry. What will Walmart do is basically make a note, a memo, knowing that make sure don't count PepsiCo inventory as part of our inventory. Then PepsiCo paid $20,000 for freight cost. Remember freight in, it's part of the inventory cost. Therefore Walmart, sorry PepsiCo will debit inventory. We're going to make it $30,000. PepsiCo paid $30,000. We're going to debit inventory $30,000. Credit cash $30,000. What will Walmart do? Practically nothing yet. They have nothing to do with anything. Now payment of advertisement costs. Now Walmart did incur $5,000. So what they did when they send a weekly offers, they just had a special offer for PepsiCo, and they had to pay $5,000 for that advertisement. That's fine. And that $5,000 PepsiCo will reimburse them for it. Simply put, PepsiCo told them, you have $5,000 budget advertised as you see fit and will reimburse you. What will PepsiCo do under those circumstances for the $5,000? Nothing yet. On the other hand, Walmart paid the $5,000. They will credit cash and they will debit a receivable from PepsiCo. Why? Because PepsiCo is going to reimburse them for that money. Now the sale took place. Now the customers bought the product. Well as of right now, there's no entry for PepsiCo. For Walmart, they will debit cash. They sold them for $320. They will debit cash $320. And they will debit cash and they will credit payable to PepsiCo $320. So this money belongs to PepsiCo as far as Walmart is concerned. They're going to take a cut of it, but part of it, the majority will be for Walmart, for PepsiCo. Now we're going to see how much money we are going, we're going to be sending to PepsiCo. PepsiCo. Okay. So we received $320,000. Here's what's going to happen. First, we're going to keep, we means Walmart will keep $5,000 for the advertisement. Then they will keep 10% of $320,000 times 10%. They will keep another $32,000 as a commission cost. So what's going to happen is this. So we're going to be, let's take a look at the calculator. And so $320, that's how much they received in cash, minus $5,000, they're going to be reimbursed, minus $32,000 is basically their commission. They're going to give, they're going to send to PepsiCo $283,000. So PepsiCo will do the following. They will debit cash $283,000. They will debit advertising expense, which is that's when they expensive. They will debit commission expense because they had to pay commission to to Walmart $32,000. And they will credit revenue, the total revenue is $320. So although the total revenue is $320, really they had, they had two additional expenses, the $5,000 and the $32,000. So now their net, net sales $283,000, although they sold $320,000, but their net sales for now is $283,000. Walmart, when they submit the $283,000, I showed you how to complete this. When they submit this money, they will debit this payable to get rid of this payable. They will debit payable to PepsiCo because now they submitted the money. They will, they will credit the $5,000 of receivable because PepsiCo now told them to keep the money. So they will credit this receivable to remove it. And they will credit commission revenue to recognize $32,000 of commission revenue. So this is the entry that Walmart will make. So at this point, Walmart would record. So notice what's happening. This revenue for Walmart, the $32,000 is an expense for PepsiCo. And the $5,000 that, that, that Walmart pay on behalf of PepsiCo, it's recorded as $5,000 expense on, on, on PepsiCo books. So simply put Walmart made $32,000, which is 10%. Now, now we have to also record cost of goods sold for PepsiCo because PepsiCo, they only sold, not only sold, they sold two-third, two-third of the goods. They still have one-third. Simply put, we have to remove two-third of, two-third of what? So we have to remove two-third of $360,000 times two-third is $240,000. Then one, then PepsiCo also incurred $30,000 in, in, in freight in, two-third of $30,000 is $20,000. Hopefully we know this. So our cost of goods sold is $260,000. And now I remember why I changed this number from $20,000 to $30,000 because we assumed we sold, we sold two-thirds. So it's easier to do two-thirds for $30,000. Okay. So now with that cost of goods sold to $60,000, credit inventory consignment would reduce our inventory consignment account by $260,000. Now we can say, well, after we deduct the cost of goods sold, so let's, let's make cost of goods sold in a different color, $260,000. All in all, PepsiCo made gross profit, gross profit of $23,000 on this, on this arrangement, made $23,000. If we take $23,000 divided by $320, it's approximately, we made approximately 7% net profit, 7%. Well, we can say, we can call it net profit, assuming we have no other, no other operating expenses. Okay. So this is basically the arrangement. And, and Walmart doesn't do anything for adjusting inventory and cost of goods sold because it's not their inventory. So all in all, this is how you, this, those are the journal entries that you are expected to know for arrangement, goods on consignment. What should you do now? Go to farhatlectures.com, register, subscribe, work MCQs, and look at other resources to reinforce those concepts. Invest in your accounting career, invest in your CPA education. Don't shortchange yourself. It's worth it. Yes, it is difficult, it's challenging, but at the end of the day, it's going to pay you, it's going to pay off. Good luck, study hard, and of course, stay safe.