Question

Yellow Company a distributor of machinery bought a machine from manufacturer in November 2016 for P500,000. On December 30, 2016, the entity sold this machine for P750,000 under the following terms: 2% discount if paid within 30 days, 1% discount if paid after 30 days but within 60 days or payable in full within 90 days if not paid within the discount period.However, the customer had the right to return this machine to Yellow Company if it was unable to resell the machine before expiration of the 90-day period, in which case the customer’s obligation to Yellow Company would be cancelled. In the net sales for the year ended December 21, 2016, what amount should be included for the sale of the machine?

Answer 1

These type of transactions are called "Sale or return basis" transactions or "Sale on approval" transactions.

Assuming the Yellow company does this type of transactions regularly (as it is distributor), so it maintains separate books "Sale or return Day book" and "Sale or return ledger".

These transactions are not recognised as sales until the customer has accepted those goods or the time period set for return is expired. Only upon happening of one of these two events, the sale is accounted.

So in the given case as the time period for return is not yet over by the end of 2016 year, no sales is recognised. (Even if we receive amounts from the buyer before accepting the sold machinery).

Note :

Accounting entries are not asked. (Sale on approval basis entries are accounted and not Sales entries)

What amount of sales is recognised is the only question, so answered for it as "no portion of sales is recognised as income for the year ended 2016"