Revenue Recognition on Book Sales with High Returns
Response to the following problem:
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.
(b) Briefly discuss the reasoning for your answers in (a) above.
(c) In late July, Uddin shipped books invoiced at $15,000,000. Prepare the journal entry to record this event that best conforms to GAAP and your answer to part (b).
(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 for the return and payment.