Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 18: 13BE (page 1033)

On July 10, 2017, Amodt Music sold CDs to retailers on account and recorded sales revenue of \(700,000 (cost \)560,000). Amodt grants the right to return CDs that do not sell in 3 months following delivery. Past experience indicates that the normal return rate is 15%. By October 11, 2017, retailers returned CDs to Amodt and were granted credit of \(78,000. Prepare Amodt’s journal entries to record (a) the sale on July 10, 2017, and (b) \)78,000 of returns on October 11, 2017, and on October 31, 2017. Assume that Amodt prepares financial statement on October 31, 2017.

Short Answer

Expert verified

No Entry on 31st October 2017

Step by step solution

01

Right to Return

A customer'sright of return frequently allows them to a full or partial refund of their purchase price, as well as a credit for future purchases. Under the new standard, a right of return is not a distinct performance requirement, but it does have an impact on the transaction price predicted for transferred products.

02

Journal entries

Date

Particulars

Debit ($)

Credit ($)

July 10, 2017

Account receivable a/c

700,000

Sales revenue a/c

700,000

July 10, 2017

Cost of goods sold a/c

560,000

Inventory a/c

560,000

October 11, 2017

Sale return and allowance a/c

78,000

Account receivable a/c

78,000

October 11, 2017

Inventory Return a/c

62,400

Cost of goods sold

62,400

Calculation of Cost of Goods Sold return is as follows:

Returncostofgoodssold=COGS SoldSalesrevenue×Valueofsalesrevenuereturn=$560,000$700,000×78,000=$62,400

Note: No entry is required for October 31, 2017.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Nate Beggs signs a 1-year contract with BlueBox Video. The terms of the contract are that Nate is required to pay a nonrefundable initiation fee of \(100. No annual membership fee is charged in the first year. After the first year, membership can be renewed by paying an annual membership fee of \)5 per month. BlueBox determines that its customers, on average, renew their annual membership three times after the first year before terminating their membership. What amount of revenue should BlueBox recognize in its first year?

Tablet Tailors sells tablet PCs combined with Internet service, which permits the tablet to connect to the Internet anywhere and set up a Wi-Fi hot spot. It offers two bundles with the following terms.

1. Tablet Bundle A sells a tablet with 3 years of Internet service. The price for the tablet and a 3-year Internet connection service contract is \(500. The standalone selling price of the tablet is \)250 (the cost to Tablet Tailors is \(175). Tablet Tailors sells the Internet access service independently for an upfront payment of \)300. On January 2, 2017, Tablet Tailors signed 100 contracts, receiving a total of \(50,000 in cash.

2. Tablet Bundle B includes the tablet and Internet service plus a service plan for the tablet PC (for any repairs or upgrades to the tablet or the Internet connections) during the 3-year contract period. That product bundle sells for \)600. Tablet Tailors provides the 3-year tablet service plan as a separate product with a standalone selling price of \(150. Tablet Tailors signed 200 contracts for Tablet Bundle B on July 1, 2017, receiving a total of \)120,000 in cash.

Instructions

(c) Repeat the requirements for part (a), assuming that Tablet Tailors has no reliable data with which to estimate the stand-alone selling price for the Internet service.

On January 2, 2017, Grando Company sells production equipment to Fargo Inc. for \(50,000. Grando includes a 2-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on January 2, 2017. During 2017, Grando incurs costs related to warranties of \)900. At December 31, 2017, Grando estimates that \(650 of warranty costs will be incurred in the second year of the warranty.

Instructions

(a) Prepare the journal entry to record this transaction on January 2, 2017, and on December 31, 2017 (assuming financial statements are prepared on December 31, 2017).

(b) Repeat the requirements for (a), assuming that in addition to the assurance warranty, Grando sold an extended warranty (service-type warranty) for an additional 2 years (2019–2020) for \)800.

What are the two types of losses that can become evident in accounting for long-term contracts? What is the nature of each type of loss? How is each type accounted for?

What was viewed as a major criticism of GAAP as it relates to revenue recognition?
See all solutions

Recommended explanations on Business Studies Textbooks

Managers

Read Explanation

Strategic Analysis

Read Explanation

Managerial Economics

Read Explanation

Corporate Finance

Read Explanation

Nature of Business

Read Explanation

Change Management

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free