Gleason Candy Inc.
There are several issues that have been raised in this case. One of them, for example, is whether the management should allow the right of return to the wholesalers or risk losing the sale? If management does allow the returns, the question becomes how it should be accounted as they have no previous recording experience. One decision made by the management was to raise the candy price by 10% in order to cover up the losses from returns. They decided not to record the expected/estimated amount of losses or returns, since it was already been covered by the raised price of candies. The main issue now is whether the management’s decision of not recording the estimated returns of merchandize violates the GAAP regulation? We have considered three alternatives. (1) Record the estimated return amount even if it is hard to estimate, (2) Raise the prices and do not record the estimated returns considering it would be immaterial, and (3) Revenue recognition should be deferred until the payment is made. We have searched FASB codification by using the key work “right of return”. In addition, we have researched Codification topics 605 Revenue Recognition. Four relevant hits have been found. FASB ASC 605-15-15-2 states that sales in which a product may be returned, whether as a matter of contract or as a matter of existing practice, either by the ultimate customer or by a party who resells the product to others. The product may be returned for a refund of the purchase price, for a credit applied to amounts owed or to be owed for other purchases, or in exchange for other products. GAAP allows the right of return and provides various options to buyer and seller. FASB ASC 605-15-25-1 states that if an entity sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at time of sale only if all of the following conditions are met: a. The seller’s price to the buyer is substantially fixed or...
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