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During 2016, the first year of operations, XYZ Corp sold goods for $10,000,000. The COGS recognized...

During 2016, the first year of operations, XYZ Corp sold goods for $10,000,000. The COGS recognized was $4,000,000. Based on past experience XYZ estimates that 8% of all sales will be returned. Actual returns during 2016 were 4%. During 2017 another 5% was returned. What is the income (ignoring taxes) that XYZ Corp will recognize during 2016?

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Answer #1

Total sales=$10,000,000.

Estimated sales returns=8%*$10,000,000

=$800,000.

Actual returns during 2016=$10,000,000*4%

=$400,000.

Allowance for sales returns to be made=$800,000 -$400,000.

Revised sales or net sales would be $10,000,000 -$800,000

=$9,200,000.

Proportionate cost of goods sold for estimated returns =($4,000,000/10,000,000)*800,000

=$320,000.

Therefore net cost of sales= Cost of sales - estimated returns cost of sales.

=$4,000,000 - $320,000.

=$3,680,000.

Income that would be recognized in 2016=Net sales - Net cost of sales

$9,200,000 -$3,680,000

=$5,520,000

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