Question

You are the recently hired CFO of MicroMash.  Bill Bates, the CEO wants your advice on the sale of a new spreadsheet software called Xcellent.  In conjuction with a two week promotion of at Office Depot stores, customers will be able to purchase the software and have the ability to return the item and receive a full refund up until 6 months from the purchase date.  Please discuss the proper accounting treatment for this transaction; 20,000 units were sold in the two week period with a cost of $120.

Answer 1

The Office Depot stores will need to estimate the percentage of expected return for which a refund liability will be created in the books
Revenue (20,000 x $ 120)=		2400000
Say estimated return is 3% and cost of goods sold is 70% of sales
Assume actual returns is		50000
General Journal	Debit	Credit
Sales	72,000
Customer Refunds Payable		72,000
(2400000 x 3%)
Estimated returns Inventory	50,400
Cost of Goods Sold (72,000 x 70%)		50,400
(To record estimated refund liability)
Customer Refunds Payable	50,000
Cash		50,000
Inventory	35,000
Estimated returns Inventory		35,000
(To record actual return)