The Floated Receipts and the Missing Settlement Statement
Roland Auction Co. conducted a machinery auction for 42 consignors. It collected $186,400 in buyer deposits and full payments, including a 10% buyer's premium. The auction contract says deposits are held in trust and settlement within 10 business days after clearance. Roland deposited all receipts into his business operating account, paid $12,300 of auction advertising and his $4,000 booth rent from that account, and sent consignors partial checks totaling $121,000. Two consignor checks bounced. A bank statement shows $38,900 remaining; outstanding consignor balances are $44,700, and one buyer's $7,500 deposit is subject to a chargeback. Roland says he 'always floats receipts' and will cure after the next sale. The board requests the trust ledger, settlement statements, and bank reconciliation. One consignor has not received any statement.
1. Evaluate Roland's handling against Louisiana trust/escrow and recordkeeping requirements. Identify the shortfall and who bears the loss.
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Trust status. Buyer deposits and sale proceeds held for consignors are trust funds, not operating capital. Depositing them into the business account commingles trust and operating money. Paying advertising and booth rent from that account is a further conversion unless the contract expressly authorizes reimbursement from trust and the funds are properly documented; ordinarily those costs are the auctioneer's business expense, recovered from commission. Shortfall. Cash on hand is $38,900, but trust claims are at least $44,700 to consignors plus the $7,500 chargeback exposure, or $52,200-about a $13,300 shortfall. The auctioneer, not consignors, bears it. A buyer chargeback should be pursued against that buyer, but pending resolution the trust account must remain intact. Records. Each consignor needs a settlement statement showing hammer price, commission, premium allocation, expenses, and net. The ledger must trace each lot and each deposit. 'Floating receipts' is unauthorized. The board should see a reconciliation, and Roland must replenish the trust from personal/business funds immediately.
2. Draft the corrective entries and controls: what must be deposited, disbursed, documented, and reported, and how should the chargeback be handled?
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Corrective entries. Restore the $13,300 shortfall with an immediate transfer from the operating account, labeled as owner contribution, so trust balance equals known liabilities. Do not wait for the next sale. Reverse the $12,300 advertising and $4,000 rent charges if they came from trust; record them as operating expenses. Controls. Open a separate trust account at a bank, with signature controls; deposit all buyer funds within the required time; disburse only by check to the named consignor or buyer refund; no cash withdrawals, no debit card, no transfers to operating except earned commission after settlement. Reconcile monthly: bank statement to trust ledger to outstanding checks. Documentation. Issue the missing settlement statement, obtain written chargeback notice, allocate chargeback to the buyer's deposit rather than reducing other consignors, and retain contracts, bid logs, bank records, and reconciliations. Notify the board in writing of the shortfall, cure, and new controls.