Chapter 18

Topics: Rate of return, Revenue, Financial statements Pages: 4 (1006 words) Published: September 19, 2012
Organic Growth Company is presently testing a number of new agricultural seeds that it has recently harvested. To stimulate interest, it has decided to grant to five of its largest customers the unconditional right of return to these products if not fully satisfied. The right of return extends for 4 months. Organic Growth sells these seeds on account for $1,500,000 on January 2, 2012. Companies are required to pay the full amount due by March 15, 2012.

(a) Prepare the journal entry for Organic Growth at January 2, 2012, assuming Organic Growth estimates returns of 20% based on prior experience. (Ignore cost of goods sold.) (b) Assume that one customer returns the seeds on March 1, 2012, due to unsatisfactory performance. Prepare the journal entry to record this transaction, assuming this customer purchased $100,000 of seeds from Organic Growth. (c) Briefly describe the accounting for these sales, if Organic Growth is unable to reliably estimate 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.

(a) Identify alternative revenue recognition criteria that Uddin could employ concerning textbook sales. (b) Briefly discuss the reasoning for your answers in (a) above. (c) In late July, Uddin shipped books invoiced at $15,000,000. Prepare the journal entry to record this event that best conforms to generally accepted accounting principles and your answer to part (b). (d) In October, $2 million of the invoiced July sales were returned according to the return policy, and the remaining $13 million was paid. Prepare the entries recording...
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