E18-15 (Sales with Returns) Uddin Publishing Co. publishes college textbooks tha

Question

E18-15 (Sales with Returns) Uddin Publishing Co. publishes college textbooks that are sold to bookstores on the following terms. Each title has a fixed wholesale price, terms f.o.b. shipping point, and payment is due 60 days after shipment. The retailer may return a maximum of 30% of an order at the retailer’s expense. Sales are made only to retailers who have good credit ratings. Past experience indicates that the normal return rate is 12%, and the average collection period is 72 days. Instructions (a) Identify the revenue recognition criteria that Uddin could employ concerning textbook sales. (b) Briefly discuss the reasoning for your answers in (a) above. (c) On July 1, 2014, Uddin shipped books invoiced at $15,000,000 (cost $12,000,000). Prepare the journal entry to record this transaction. (d) On October 3, 2014, $1.5 million of the invoiced July sales were returned according to the return policy, and the remaining $13.5 was paid. Prepare the journal entries for the return and payment.

Explanation / Answer

Requirement a:

Revenue Recognition Criteria:

Revenue should be recognised at the value net of estimated returns since there is an estimated sales returns.

Requirement b:

Reason:

Revenue should be recognised only when there is certainity in the collection of revenue and when there is transfer of risk and ownership.

Here, Ownership and risk of few goods may not tranfer because of the estimated returns. Hence revenue should be recognised net of estimated sale returns.

Requirement c:

Journal Entry as on July 1 2014:

Date

Particulars

Debit

Credit

July 1 2014

Sales Returns a/c (15000000 * 12%)                  Dr

Accounts Receivable a/c Dr

       To Sales a/c

[Being Books invoiced at $15000000 and returns are estimated at 12%]

$1800000

$13200000

$15000000

Cost of Goods Sold a/c Dr

       To Inventory (12000000 * (1 – 0.12))

[Recognition of cost of goods sold net of returns]

$10560000

$10560000

Requirement d:

Journal Entry as on October 3 2014:

Date

Particulars

Debit

Credit

October 3 2014

Accounts Receivable a/c                                     Dr

      To Sales Returns a/c

[Reversal of Sales Returns]

$300000

$300000

Cash a/c Dr

       To Accounts Receivables a/c

[Being payment received regarding sales made net of returns]

$13500000

$13500000

Cost of Goods Sold a/c Dr

       To Inventory a/c

[Booking of Cost of Goods Sold to the extent of difference between actual returns and booked returns]

$240000

$240000

Returns booked = 12%

Actual Returns = 1500000 / 15000000 = 10%

Returns to be reversed:

Sales booking: $1800000 - $1500000 = $300000

Cost of Goods Sold Booking: $12000000 (0.12 -0.10) = $240000

Date

Particulars

Debit

Credit

July 1 2014

Sales Returns a/c (15000000 * 12%)                  Dr

Accounts Receivable a/c Dr

       To Sales a/c

[Being Books invoiced at $15000000 and returns are estimated at 12%]

$1800000

$13200000

$15000000

Cost of Goods Sold a/c Dr

       To Inventory (12000000 * (1 – 0.12))

[Recognition of cost of goods sold net of returns]

$10560000

$10560000

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