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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

P18-4 (LO2,3,4) (Allocate Transaction Price, Discounts, Time Value) Economy Appliance Co. manufactures low-price, no-frills appliances that are in great demand for rental units. Pricing and cost information on Economy鈥檚 main products are as follows

Item

Standalone Selling price (cost)

Refrigerator

\(500 (\)260)

Range

560 (275)

Stackable washer/dryer unit

700 (400)

Customers can contract to purchase either individually at the stated prices or a three-item bundle with a price of $1,800. The bundle price includes delivery and installation. The economy also provides installation (not a separate performance obligation).

Instructions

Respond to the requirements related to the following independent revenue arrangements for Economy Appliance Co.

(c) Refer to the arrangement in part (b). It would help Yellowcard secure lease agreements with students if the installation of the appliance bundles can be completed by July 1, 2017. Yellowcard offers a 10% bonus payment if the Economy can complete installation by July 1, 2017. The economy estimates its chances of meeting the bonus deadline to be 90%, based on a number of prior contracts of a similar scale. Repeat the requirement for part (b), given this bonus provision. Assume installation is completed by July 1, 2017.

(Recognition of Profit on Long-Term Contracts) During 2017, Nilsen Company started a construction job with a contract price of \(1,600,000. The job was completed in 2019. The following information is available.

2017 2018 2019

Costs incurred to date \)400,000 \(825,000 \)1,070,000

Estimated costs to complete 600,000 275,000 鈥�0鈥�

Billings to date 300,000 900,000 1,600,000

Collections to date 270,000 810,000 1,425,000

Instructions

(a) Compute the amount of gross profit to be recognized each year, assuming the percentage-of-completion method is used.

(Long-Term Contract鈥擯ercentage-of-Completion) Widjaja Company is accounting for a long-term construction contract using the percentage-of-completion method. It is a 4-year contract that is currently in its second year. The latest estimates of total contract costs indicate that the contract will be completed at a profit to Widjaja Company.

Instructions

(a) What theoretical justification is there for Widjaja Company鈥檚 use of the percentage-of-completion method?

(b) How would progress billings be accounted for? Include in your discussion the classification of progress billings in Widjaja Company financial statements.

(c) How would the income recognized in the second year of the 4-year contract be determined using the cost-to-cost method of determining percentage of completion?

(d) What would be the effect on earnings per share in the second year of the 4-year contract of using the percentage-of-completion method instead of the completed-contract method? Discuss.

Question: P18-11 (LO5,6,7) EXCEL (Long-Term Contract with an Overall Loss) On July 1, 2017, Torvill Construction Company Inc. contracted to build an office building for Gumbel Corp. for a total contract price of \(1,900,000. On July 1, Torvill estimated that it would take between 2 and 3 years to complete the building. On December 31, 2019, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Gumbel for 2017, 2018, and 2019.

At 12/31/17

At 12/31/18

At 12/31/19

Contract cost incurred to date

\)300,000

\(1,200,000

\)2,100,000

Estimated cost to complete contract

1,200,000

800,000

0

Billings to Gumbel

300,000

1,100,000

1,850,000

Instructions

Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2017, 2018, and 2019. (Ignore income taxes.)

Guillen, Inc. began work on a \(7,000,000 contract in 2017 to construct an office building. Guillen uses the completed-contract method. At December 31, 2017, the balances in certain accounts were Construction in Process \)1,715,000, Accounts Receivable \(240,000, and Billings on Construction in Process \)1,000,000. Indicate how these accounts would be reported in Guillen鈥檚 December 31, 2017, balance sheet.
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