E18-21 (Sales with Returns) (LO 3) Uddin Publishing Co. publishes college textbo
ID: 2509801 • Letter: E
Question
E18-21 (Sales with Returns) (LO 3) 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%. The costs of recovery are expected to be immaterial, and the textbooks are expected to be resold at a profit. 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, 2017, Uddin shipped books invoiced at $15,000,000 (cost $12,000,000). Prepare the journal entry to record this transaction. (d) On October 3, 2017, $1.5 million of the invoiced July sales were returned according to the return policy, and the (e) Assume Uddin prepares financial statements on October 31, 2017, the close of the fiscal year. No other returns are anticipated. Indicate the amounts reported on the income statement and balance related to the above transactions.Explanation / Answer
(a) Uddin has 3 options. Recognize revenue at the point of sale since the Sales term is F.O.B shipping point. Recognize revenue on the basis of cash collected since the compny follows a return policy. Recognize revenue as FOB shipping point sales minus estimated returns since returns can be estimated. (b) As per FASB Statement no.48 appropriate treatment would be the 3rd option. © Date Account titles and explanation Debit Credit 2017 Jul 1. Accounts receivable 15000000 Sales revenue 15000000 (Recorded sales) Jul 1. Sales return (15000000*12%) 1800000 Allowance for sales returns 1800000 (Recorded allowance for returns) Jul 1. Cost of goods sold 12000000 Inventory 12000000 (Recorded cost of goods sold) (d) Oct 3. Allowance for sales returns 1800000 Accounts receivable 1500000 Sales return 300000 (Recorded actual sales returns) e) Income statement (Extract) Sales revenue 15000000 Less: Sales returns 1500000 Net sales 13500000 Less: Cost of goods sold 12000000 Gross profit 1500000 Balance sheet (Extract) Accounts receivable (15000000-1500000) 13500000 Inventory -12000000
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