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Chapter 18: 23Q (page 1031)

Explain the accounting for sales with the right of return.

Short Answer

Expert verified

Revenue is recognized by companies with the right of return when the company鈥檚 assets have the right to reclaim inventory from clients.

Step by step solution

01

Meaning of Right of Return

Customers who use their right of return are frequently entitled 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 no longer a discrete performance criterion, albeit it does have an impact on the transaction price assessed for transferred products.

02

Accounting for sale with right of return

Companies mainly recognize all of the following when accounting for sales with return rights (and some services that are supplied subject to a refund).

a. Revenue for transferred things in the amount of consideration to which the seller is reasonably assured to be entitled, taking into account products that are expected to be returned or for which allowances are made.

b. An asset that represents the company's right to recover inventory from consumers (along with a cost of goods sold adjustment).

If the firm can't forecast the number of returns, it shouldn't record revenue until it can.

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Most popular questions from this chapter

Kristin Company sells 300 units of its products for \(20 each to Logan Inc. for cash. Kristin allows Logan to return any unused product within 30 days and receive a full refund. The cost of each product is \)12. To determine the transaction price, Kristin decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the probability-weighted amount. Using the probability-weighted amount, Kristin estimates that (1) 10 products will be returned and (2) the returned products are expected to be resold at a profit. Indicate the amount of (a) net sales, (b) estimated liability for refunds, and (c) cost of goods sold that Kristen should report in its financial statements (assume that none of the products have been returned at the financial statement date).

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.

Hillside Company enters into a contract with Sanchez Inc. to provide a software license and 3 years of customer support. The customer-support services require specialized knowledge that only Hillside Company鈥檚 employees can perform. How many performance obligations are in the contract?

(Determine Transaction Price) Taylor Marina has 300 available slips that rent for $800 per season. Payments must be made in full by the start of the boating season, April 1, 2018. The boating season ends October 31, and the marina has a December 31 year-end. Slips for future seasons may be reserved if paid for by December 31, 2018. Under a new policy, if payment for 2019 season slips is made by December 31, 2018, a 5% discount is allowed. If payment for 2020 season slips is made by December 31, 2018, renters get a 20% discount (this promotion hopefully will provide cash flow for major dock repairs).

On December 31, 2017, all 300 slips for the 2018 season were rented at full price. On December 31, 2018, 200 slips were reserved and paid for the 2019 boating season, and 60 slips were reserved and paid for the 2020 boating season.

Instructions

(a) Prepare the appropriate journal entries for December 31, 2017, and December 31, 2018.

(b) Assume the marina operator is unsophisticated in business. Explain the managerial significance of the above accounting to this person.

How should a franchisor account for continuing franchise fees and routine sales of equipment and supplies to franchisees?
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