(Right of Return)
Gyro Company is presently testing a number of new weed control products that it recently developed. 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.
Gyro sells these products on account for $2,000,000 on January 2, 2014. Companies are required to pay the full amount due by March 15, 2014.
Instructions
(a) Prepare the journal entry for Gyro at January 2, 2014, assuming Gyro estimates returns of 20% based on prior experience. (Ignore cost of goods sold.)
(b) Assume that one customer returns the product on March 1, 2014, due to unsatisfactory performance. Prepare the journal entry to record this transaction, assuming this customer purchased $200,000 of product from Gyro.
(c) Briefly describe the accounting for these sales, if Gyro is unable to reliably estimate returns.