(Revenue Recognition on Book Sales with High Returns)
Chester Books Co. publishes romance 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 maximum 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 textbook 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.