Question

One of your favorite clients comes in to discuss a dilemma she is having. She is offering a new product, and she would like to offer a sales incentive to encourage customers to try it. The offer would be for a 25% refund of the sale price. Customers would submit proof of purchase with a refund form and the refund would be mailed to them.

Her question is how to record revenues when a refund is being offered. Customers will be given several months to send in for the refund and at the end of the quarter she will not be able to estimate the amount of refunds that will be paid out. She is however confident in her estimate of gross revenue on sales of this product for the next quarter of $75,000 and cost of goods sold of 65% of revenue.

Luckily for you, you are a genius when it comes to using the codification. Finding a solid answer for her on how to record revenue with a refund offer will only take a few minutes.

You think this through and develop your response.

Define the issue:

Determine path:

Identify alternatives:

Cite relevant codification §s:

Answer 1

Answer- As the client is offering sales incentive to customers in future not at the time of purchase it would treated as current liability but which is not certain. As 25% refund will be given on submission of purchase proof and it may take several months to send in for the refund and she is not able to estimate refund offer. As per FASB codification ASC-606-10-55-41 to acquire additional goods or services for free or at a discount which may be in many forms like sales incentives, rewards credit, future discount vouchers,loyalty credits etc.

As mentioned in the case refund of 25% of sale price is a future obligation and if the liklihood that the customer will claim the refund is 90% ,so to record revenue with a refund offer can be calculated as:

Gross Revenue Estimation for next quarter = $75000

Refund offer@25% with a liklihood of 90% = $16875 ($75000*25%*90%)

Total = $91875

Then after this the client should transfer $73500 ($91875/125*100) to its new product and recognize revenue when control transfers while $1500 ($75000-$73500) should be transfered to discount voucher and recognize revenue for this voucher when customer claims it.