Question

Lara’s Gentle Clothing (LGC) sells gently used women’s clothing. LGC receives used clothing from individuals to display in the shop. LGC receives 40% of the selling price and pays the remaining 60% to the individual who brought the clothing in. LGC takes possession of the clothing; however, payments are made to the individuals who drop off the clothing only once the items are sold. During the year ended December 31, 2020, LGC sold clothing that generated revenue of $110,800 on gross proceeds of $277,000. LGC also had goods priced at $27,700 displayed in the store at December 31, 2020.

(a) On December 31, 2020, what is the amount of inventory that should be recorded by LGC?

Answer 1

LGC should not record any inventory in its books as at December 31, 2020 since LGC is merely acting as a commission agent. LGC is not buying goods from individuals and then selling those goods. LGC receives 40% of the selling price and pays the remaining 60% to the individual who brought the clothing in. LGC takes possession of the clothing; however, payments are made to the individuals who drop off the clothing only once the items are sold. Hence,inventory belongs to the individuals who bring it. If there is no sale of any inventory, LGC will not pay any amount to those individuals who brought the inventory.

Hence, no inventory should be recorded in the books of LGC.