Question

Under contract, Sojourn Co. delivers 1,000 units to Customer A for $50 each on 1 April. Sojourn’s documented policy is to allow a customer to return any unused product within 90 days and receive a full refund. The cost of each product is $35. On the basis of historical experience, Sojourn estimates that 4% of the units will be returned. Sojourn expects that the returned products can be resold.

Required:

Record the journal entries to be made by Sojourn on 1 April to recognize the sale.

Answer 1

Since the returns can be estimated, Sojourn estimates revenue to be the most likely consideration it will receive. This amount is $48,000, which represents 960 (1,000 units × 96%) products expected to be retained by the customer, multiplied by the price of $50 per unit. At the same time, a refund liability for the products expected to be returned will be reported at $2,000. This is based on 40 units expected to be returned (4% × 1,000 units) at a price of $50 per unit. A right to recovery asset is set up for the units at $1,400 (40 units at $35 each). This will result in a cost of goods sold equal to $33,600, which represents 960 units at $35 each. Below, are the entries to record the sale on delivery to the customer:

1 April :

Dr. Accounts receivable (1,000 × $50)                            50,000

            Cr. Revenue                                                                                      48,000

            Cr. Refund liability                                                                             2,000

 

Dr. Cost of goods sold                                                       33,600

Dr. Right to recovery asset                                                  1,400

            Cr. Inventory (1,000 × $35)                                                             35,000