Question

Organic Growth Company is presently testing a number of new agricultural seeds that it has recently harvested. 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. Organic Growth sells these seeds on account for $1,500,000 (cost $800,000) on January 2, 2014. Customers are required to pay the full amount due by March 15, 2014.

(c) Briefly describe the accounting for these sales if Organic Growth is unable to reliably estimate returns.

Answer 1

Here indirectly the organic growth company giving guarantee for their product.

They said the the customers can return the seeds if they are not satisfied with them

But the time of return is only for 4 months.

And at the time of sale the seller recieves no money from buyer and the amount will be paid by customers in.march 15

So here we explain the recognition of income.

1. The seller recognise the debtors

2. On March 14 receiving the amount the seller should not recognize entire amount as income on the cost of good sold to be recognized as income and rest of that amount is to be kept aside .

3. the company has to estimate the percentage of sales that can be expected to get returned by the customer with intime and for which the amount to be paid by the seller.

4. The estimated returns amount to be kept as a reserve .

5. If the estimated returns are came from Customers the amount kept in reserve to be utilised to pay them and if more than estimated came, then pay from other resources and, if less than estimated returns are came then transfer the amount remaining in the reserve to income account and recognize as income.

6. If there is no returns from the customers the estimated returns amount to be kept in reserve for 4 months and after expiry of 4 months and loss of right to return to the customers the amount is to be recognized as income .

These are all the points regarding the recognition of income.