ACTP 5007_class 5 (2009 - 13e) - Exercise 18-1 Revenue Recognition on Book Sales with High Returns Uddin Publishing Co publishes college textbooks that

ACTP 5007_class 5 (2009 - 13e) - Exercise 18-1 Revenue...

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Exercise 18-1 Revenue Recognition on Book Sales with High 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 alternative revenue recognition criteria that Uddin could employ concerning textbook sales. Uddin could recognize revenue at the point of sale based upon the time of shipment because the books are sold f.o.b. shipping point. Because of the return policy one might argue in favor of the cash collection basis. Because the returns can be estimated, one could argue for shipping point less estimated returns. (b) Briefly discuss the reasoning for your answers in (a) above. Based on the available information and lack of any information indicating that any of the criteria in FASB Statement No. 48 were not met, the correct treatment is to report revenue at the time of shipment as the gross amount less the 12% normal return factor. This is supported by the legal test of transfer of title and the criteria in SFAS No. 48. One could be very conservative and use the 30% maximum return allowance. © 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). Accounts Receivable 15,000,000 Sales Revenue—Texts 15,000,000 Sales Returns* ($15,000,000 X 12%) 1,800,000 Allowance for Sales Returns 1,800,000 (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 the return and payment. Sales Returns* 200,000 Allowance for Sales Returns 1,800,000 Accounts Receivable 2,000,000 Cash 13,000,000 Accounts Receivable 13,000,000 *A debit to Sales Revenue—Texts or Sales Returns could be made here.
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Exercise 18-2 (Sales Recorded Both Gross and Net) On June 3, Hunt Company sold to Ann Mount merchandise having a sale price of $8,000 with terms of 2/10, n/60 f.o.b. shipping point. An invoice totaling $120 terms n/30 was received goods, June 5, Mount notified Hunt company that merchandise costing $600 contained flaws that rendered it worthless. The same day Hunt Company issued a credit memo covering the merchandise and asked that it be returned at company expense. The freight on the returned merchandise was $24, paid by Hunt Company on June 7. On June 12, the company received a check for the balance due from Mount. Instructions: (a) Prepare journal entries on Hunt Company books to record all the events noted above under each of the following bases.
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