Question

E18-8B (L03) (Sales with Returns) Natural 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. Natural Growth sells these seeds on account for $1,800,000 (cost $950,000) on January 2, 2017. Customers are required to pay the full amount due by March 15, 2017.

(c) Briefly describe the accounting for these sales if Natural Growth is unable to reliably estimate returns.

Answer 1

Revenue can be recognised when right to return expires. Thus Unearned income should be recognized as below:

Accounts Receivable $1,800,000

To Unearned Revenue $1,800,000

Inventory would move out, thus Inventory should be reduced with following journal entry:

Consigned Inventory $950,000

To Finished Goods Interview $950,000

Once the 4 months is over without return, Follwoing entries can be passed.

Unearned Revenue $1,800,000

To Revenue $1,800,000

Cost of Goods Sold $950,000

To Consigned Inventory $950,000