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Unformatted text preview: B EXERCISES E18-1B (Revenue Recognition on Book Sales with High Returns) Chester Books Co. publishes ro- mance novels 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 90 days after shipment. The retailer may return a maxi- mum of 20% 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 16%, and the average collection period is 97 days. Instructions (a) Identify alternative revenue recognition tests that Chester Books could employ concerning text- book sales. (b) Briefly discuss the reasoning for your answers in (a) above. (c) In late October, Chester shipped books invoiced at $6,500,000. Prepare the journal entry to record this event that best conforms to generally accepted accounting principles and your answer to part (b). (d) In January, $725,000 of the invoiced October sales were returned according to the return policy, and the remaining amounts were paid. Prepare the entry recording the return and payment. E18-2B (Sales Recorded Both Gross and Net) On October 5, Veri-Wyn Company sold to Dunn & Brooks merchandise having a sale price of $23,000 with terms of 1/10, n/30, f.o.b. shipping point. Dunn & Brooks received the goods on October 9 and promptly notified Veri-Wyn Company that merchandise costing $2,400 contained flaws that rendered it worthless. The same day Veri-Wyn Company issued a credit memo covering the worthless merchandise and asked that it be returned at company expense. An invoice totaling $230, terms n/30, was received by Dunn & Brooks on October 8 from Sugarland Express for the freight cost. The freight on the returned merchandise was $36, paid by Veri-Wyn Com- pany on October 25. Finally, Veri-Wyn received a check for the balance due from Dunn & Brooks on November 2. Instructions (a) Prepare journal entries on Veri-Wyn Company books to record all the events noted above under each of the following bases. (1) Sales and receivables are entered at gross selling price. (2) Sales and receivables are entered net of cash discounts. (b) Prepare the journal entry under basis 2, assuming that Dunn & Brooks remitted the payment on October 14. E18-3B (Revenue Recognition on Annual Country Club Dues with Discounts) KimoCo Country Club is an exclusive country club located in North Dakota that offers a maximum of 1,000 annual memberships that it sells for $16,000 per year. Payments must be made in full at the start of the golfing season, April 1. Memberships for the next season may be reserved if paid for by December 31. Under a new policy, if payment is made by December 31, a 10% discount is allowed. The golfing season ends September 30, and the country club has a December 31 year-end. To provide cash flow for construction of an indoor pool and fitness center, the Board of Directors is also offering a 20% discount to members who pay for a 2-year membership before December 31.membership before December 31....
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