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CMA Intermediate · Financial Accounting · Consignment

In consignment accounts, how is a normal loss (such as evaporation or shrinkage inherent in the nature of goods) treated when valuing the consignment stock and computing profit?

Normal loss is not shown separately. Its cost is absorbed by the good units that remain, so the per-unit cost of the consignment stock increases. Only abnormal loss is credited to the Consignment Account and written off separately, because normal loss is inherent in the nature of the goods.

  1. AThe cost of normal loss is absorbed by the remaining good units, raising the per-unit cost of stockCorrect
  2. BIt is credited to the Consignment Account and charged to the Profit and Loss Account as an abnormal item
  3. CIt is debited to the Consignee's personal account and recovered from him
  4. DIt is ignored in computing per-unit cost, so the stock is valued at the original invoice cost per unit

Explanation

A normal loss is unavoidable and inherent in the business, so its cost is spread over the units that remain. The cost per unit of good stock therefore rises. Treating it as an abnormal item (option 2) is wrong because only abnormal loss is separately credited to Consignment Account and charged to Profit and Loss.

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