Consignment of Handloom Carpets: Stock Valuation, Del Credere and NRV
M/s Anand Textiles of Surat consigned 2,000 handloom carpets to Bhalla & Co. of Jaipur on 1 January 20X5. Each carpet cost Anand ₹1,800 and was invoiced at cost plus 25%. Anand paid freight ₹75,000 and transit insurance ₹25,000. Bhalla paid unloading charges ₹9,700 and godown rent ₹29,100.
By 31 March, Bhalla had sold 1,600 carpets at ₹2,900 each, of which ₹16,00,000 was on credit and the balance for cash. His ordinary commission is 6% on sales, plus a del credere commission of 2% on credit sales only.
Sixty carpets were damaged in transit and are unfit for sale. The insurer admitted a claim of ₹70,000, received in April 20X5.
One credit customer owing ₹58,000 became insolvent; Bhalla recovered only ₹12,000 from the estate and, relying on the del credere arrangement, refuses to bear the shortfall.
Bhalla reports 340 undamaged carpets in hand on 31 March. On that date the wholesale price of such carpets had fallen to ₹1,700 each, and Bhalla would incur selling expenses of ₹40,000 to dispose of them.
1. Value the closing stock with Bhalla and compute the abnormal loss, explaining which expenses are apportioned and over what quantity.
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Closing stock - 340 carpets.
- Purchase cost: ₹1,800 per carpet.
- Consignor's expenses, apportioned over all 2,000 carpets despatched: (75,000 + 25,000) / 2,000 = ₹50 per carpet.
- Consignee's expenses, apportioned over the 1,940 undamaged carpets actually received: (9,700 + 29,100) / 1,940 = ₹20 per carpet. The 60 carpets damaged in transit never reached Bhalla, so they carry no consignee expense.
- Commission is never added to stock.
Value = 340 × (1,800 + 50 + 20) = 340 × ₹1,870 = ₹6,35,800.
Abnormal loss. The 60 carpets lost in transit are measured at cost plus the consignor's expenses only: 60 × (1,800 + 50) = ₹1,11,000. Less the admitted claim of ₹70,000, the net abnormal loss written off to profit and loss is ₹41,000. The insurance claim is a recoverable (a debtor), not a reduction of consignment profit, so the consignment account is credited with the gross ₹1,11,000 and the abnormal loss account absorbs the net ₹41,000.
Why apportion over two different bases. The consignor's costs attach to the goods from the moment they leave Surat, so the damaged units must share them. The consignee's costs attach only to goods that arrive and are handled, so they are spread over the 1,940 units received.
2. Compute the profit on consignment and explain how the del credere clause changes the result.
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| ₹ | |
|---|---|
| Sales (1,600 × 2,900) | 46,40,000 |
| Less cost of goods sold (1,600 × 1,800) | (28,80,000) |
| Less consignor's expenses on goods sold (1,600 × 50) | (80,000) |
| Less consignee's expenses on goods sold (1,600 × 20) | (32,000) |
| Less ordinary commission 6% of 46,40,000 | (2,78,400) |
| Less del credere commission 2% of 16,00,000 | (32,000) |
| Less net abnormal loss | (41,000) |
| Profit on consignment | 12,96,600 |
Del credere. Because Bhalla accepts the del credere risk, the ₹46,000 shortfall on the insolvent customer (58,000 − 12,000) is borne by him. Anand records the full ₹58,000 as collected through the consignee and pays an extra 2% on credit sales, ₹32,000, for that risk-bearing service. Bhalla debits the bad debt in his own books and settles the consignment account in full.
Had there been no del credere clause, the ₹46,000 would be a consignment expense and the profit ₹12,50,600, with no ₹32,000 commission.
Cross-check (account form): debit goods sent 36,00,000 + consignor's expenses 1,00,000 + consignee's expenses 38,800 + commissions 3,10,400 = ₹40,49,200; credit sales 46,40,000 + closing stock 6,35,800 + gross abnormal loss 1,11,000 = ₹53,86,800; gross profit ₹13,37,600 less net abnormal loss ₹41,000 = ₹12,96,600.
3. The consignor wants the 340 carpets carried at ₹6,35,800 regardless of the fall in wholesale price. Advise, with computation.
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AS 2 requires inventories to be carried at the lower of cost and net realisable value, compared item by item or by category, not on the aggregate. For consignment stock, 'cost' means the consignor's cost plus attributable expenses, but that is only a ceiling; NRV then caps it.
- Cost as computed: 340 × ₹1,870 = ₹6,35,800.
- NRV: 340 × ₹1,700 = ₹5,78,000, less estimated selling expenses ₹40,000 = ₹5,38,000.
Since NRV is lower, the stock must be carried at ₹5,38,000, and consignment profit falls by ₹97,800. The write-down is an ordinary expense of the period, not an abnormal loss, and it is not netted against the insurance claim.
Practical points:
- The comparison is made per item or per homogeneous category; if only some designs had fallen in price, only those would be written down.
- The ₹40,000 of selling expenses excludes Bhalla's 6% commission on the notional sale only if a separate estimate is more reliable; whichever basis is used must be consistent.
- The write-down must be disclosed, since it turns a comfortable margin into a much thinner one and signals that the invoice price of cost plus 25% is above the market.