The Trust Account That Paid Payroll
After a two-day consignment auction, an auctioneer collects $52,000 in cash, checks, and card receipts. The sale generated $44,200 in hammer prices and $7,800 in buyer's premiums. The auctioneer's commission is 15% of hammer, and he advanced $1,100 for advertising. He cannot find the trust account deposit book, so he deposits all $52,000 into his business operating account. Over the next week he uses $6,500 from that account to pay ring staff, rent, and a truck payment. He pays the consignor $36,000 on day 20, explaining that 'the rest is commission and expenses.' The consignor calculates that the net should be higher and asks for an accounting. The auctioneer says the money was always available in the operating account and no one lost anything. A Board investigator later asks for bank records and the consignor's settlement statement.
1. Explain the trust-fund and commingling rules that apply to the $52,000.
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All money received from the auction, including hammer prices and buyer's premiums, is trust money until disbursed to the consignor and the auctioneer's earned fees. It must be deposited in a separate trust account and not commingled with the auctioneer's operating funds. Using trust money to pay rent, staff, or a truck payment is conversion, even if the account balance never goes negative. The trust account is not a business line of credit. The auctioneer must be able to identify each consignor's funds. The Board can discipline for commingling, conversion, and inadequate records.
2. Compute the correct disbursement and identify the accounting errors.
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Hammer prices were $44,200; the 15% commission is $6,630. Reimbursable advertising is $1,100. The consignor's net is $44,200 minus $6,630 minus $1,100, which equals $36,470. The $7,800 buyer's premium belongs to the auctioneer only if the contract and disclosures say so; it is still trust money until accounted for. The auctioneer paid $36,000, so he is short $470. The operating-account payments do not change the trust obligation. He must restore any shortage immediately and provide a settlement statement showing gross, commission, expenses, premium, and net.
3. What records and corrective actions are required?
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He should reconstruct a ledger for the sale, deposit all remaining trust money, restore the $470 shortage, and pay the consignor. He needs bank statements, receipts, bidder records, the consignor contract, and settlement statements. Records should be kept for the period required by the Board, generally at least three years. He should notify the Board and cooperate. Future sales require daily trust deposits, no operating withdrawals, and monthly reconciliation.