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Chapter 18: 13BE (page 1033)

On July 10, 2017, Amodt Music sold CDs to retailers on account and recorded sales revenue of \(700,000 (cost \)560,000). Amodt grants the right to return CDs that do not sell in 3 months following delivery. Past experience indicates that the normal return rate is 15%. By October 11, 2017, retailers returned CDs to Amodt and were granted credit of \(78,000. Prepare Amodt鈥檚 journal entries to record (a) the sale on July 10, 2017, and (b) \)78,000 of returns on October 11, 2017, and on October 31, 2017. Assume that Amodt prepares financial statement on October 31, 2017.

Short Answer

Expert verified

No Entry on 31st October 2017

Step by step solution

01

Right to Return

A customer'sright of return frequently allows them to a full or partial refund of their purchase price, as well as a credit for future purchases. Under the new standard, a right of return is not a distinct performance requirement, but it does have an impact on the transaction price predicted for transferred products.

02

Journal entries

Date

Particulars

Debit ($)

Credit ($)

July 10, 2017

Account receivable a/c

700,000

Sales revenue a/c

700,000

July 10, 2017

Cost of goods sold a/c

560,000

Inventory a/c

560,000

October 11, 2017

Sale return and allowance a/c

78,000

Account receivable a/c

78,000

October 11, 2017

Inventory Return a/c

62,400

Cost of goods sold

62,400

Calculation of Cost of Goods Sold return is as follows:

Returncostofgoodssold=COGS鈥�SoldSalesrevenue脳Valueofsalesrevenuereturn=$560,000$700,000脳78,000=$62,400

Note: No entry is required for October 31, 2017.

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Most popular questions from this chapter

Explain the current environment regarding revenue recognition.

In September 2017, Gaertner Corp. commits to selling 150 of its iPhone-compatible docking stations to Better Buy Co. for \(15,000 (\)100 per product). The stations are delivered to Better Buy over the next 6 months. After 90 stations are delivered, the contract is modified and Gaertner promises to deliver an additional 45 products for an additional \(4,275 (\)95 per station). All sales are cash on delivery.

Instructions

(a) Prepare the journal entry for Gaertner for the sale of the first 90 stations. The cost of each station is $54.

(b) Prepare the journal entry for the sale of 10 more stations after the contract modification, assuming that the price for the additional stations reflects the standalone selling price at the time of the contract modification. In addition, the additional stations are distinct from the original products as Gaertner regularly sells the products separately.

(c) Prepare the journal entry for the sale of 10 more stations (as in (b)), assuming that the pricing for the additional products does not reflect the standalone selling price of the additional products and the prospective method is used.

What methods are used in practice to determine the extent of progress toward completion? Identify some 鈥渋nput measures鈥� and some 鈥渙utput measures鈥� that might be used to determine the extent of progress.

On January 2, 2017, Grando Company sells production equipment to Fargo Inc. for \(50,000. Grando includes a 2-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on January 2, 2017. During 2017, Grando incurs costs related to warranties of \)900. At December 31, 2017, Grando estimates that \(650 of warranty costs will be incurred in the second year of the warranty.

Instructions

(a) Prepare the journal entry to record this transaction on January 2, 2017, and on December 31, 2017 (assuming financial statements are prepared on December 31, 2017).

(b) Repeat the requirements for (a), assuming that in addition to the assurance warranty, Grando sold an extended warranty (service-type warranty) for an additional 2 years (2019鈥�2020) for \)800.

Wood-Mode Company is involved in the design, manufacture, and installation of various types of wood products for large construction projects. Wood-Mode recently completed a large contract for Stadium Inc., which consisted of building 35 different types of concession counters for a new soccer arena under construction. The terms of the contract are that upon completion of the counters, Stadium would pay \(2,000,000. Unfortunately, due to the depressed economy, the completion of the new soccer arena is now delayed. Stadium has therefore asked Wood-Mode to hold the counters for 2 months at its manufacturing plant until the arena is completed. Stadium acknowledges in writing that it ordered the counters and that they now have ownership. The time that Wood-Mode Company must hold the counters is totally dependent on when the arena is completed. Because Wood-Mode has not received additional progress payments for the counters due to the delay, Stadium has provided a deposit of \)300,000.

Instructions

(a) Explain this type of revenue recognition transaction.

(b) What factors should be considered in determining when to recognize revenue in this transaction?

(c) Prepare the journal entry(ies) that Wood-Mode should make, assuming it signed a valid sales contract to sell the counters and received at the time the $300,000 deposit.
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