Question

Kim's Auction House (KAH) facilitates estate sales. It earns 20% commission on all completed sales, which is deducted from the "hammer price" (i.e. price agreed to by the winning bidder). Almost two years ago, Leonard (a.k.a. Spock) passed away. On 12/31/15, Estate of Leonard signs a fully binding consignment agreement and delivers Star Trek memorabilia to KAH's showroom in Beverly Hills. The wholesale value of the memorabilia is $1 million, but Kim, a Star Trek expert, expects to sell it for $2 million in a well publicized auction. Fill in the blank, and explain why.

1. KAH should record ( ) of inventory on its 12/31/15 balance sheet related to Leonard contract?

2. KAH should recognize ( ) of revenue on its 2015 income statement related to signing Leonard contract?

Answer 1

This is case of Consingment sale. In this case KAH is acting as consignee on behal of estate of Leonard. Thus the memorabilia will be considered as stock of leonard estate and KAH cannot consider it as its stock on the balancesheet.

The anaswer to 2 question are as below.

1) KAH should not record the memorabilia as its inventory as this is an consinment agreement and thus actual ownership lies with the consignor ie estate of Leonard.

2) KAH should not record any revenue as this is an consinment agreement and thus actual ownership lies with the consignor ie estate of Leonard.