Final answer:
The consignee in a consignment sale prepares an "account report" for the consignor detailing sales, expenses, and cash receipts, and does not record the merchandise as an asset nor a liability, nor recognizes revenue upon shipment to the consignor.
Step-by-step explanation:
In consignment sales, the consignee is the party that is tasked with selling the goods on behalf of the consignor. However, title to the goods remains with the consignor until the goods are sold. Because of this, the correct answer to the student's question is that the consignee:
- Does not record the merchandise as an asset on its books because ownership has not changed hands. Instead, the consignor retains the asset on their balance sheet.
- Does not record a liability for the merchandise held on consignment since the consignee is not obliged to pay for the goods unless they are sold.
- Does not recognize revenue when it ships merchandise to the consignor. Revenue is recognized when the consignee sells the merchandise to a third party.
- Prepares an "account report" for the consignor, which indeed shows sales, expenses, and cash receipts related to the consigned goods, to keep the consignor informed about the status of the consignment.