All you need to know re: the Revenue, Ethics and Performance Analysis topics within the Corporate Reporting Advanced Level exam. Easy to use checklists perfect for the open book exam. The hard work has already been done for you!
EXAMPLE 1 SALE WITH RIGHT OF RETURN
"Co A operates a number of high-end handbag outlets. On 28-Jan-X9, it sells 50
identical bags to different customers for £850 each. The bags cost £400 each. The
customers have 28 days in which they can return purchases in exchange for a full
refund and based on past experience, Co A expects a returns level of 6%. In the
February sale the selling price of the bags will be reduced to 50% of the original price
from that date. How would Co A account for the sale of the bags."
- Co A expects 3 bags (6% x 50) to be returned. Therefore, on 28-Jan-X9 revenue is
recognised in relation to 47 (50 - 3) bags, giving a total of £39,950 (47 x £850).
- A refund liability of £2,550 (3 x £850) is recognised.
- The cost of 47 bags of £18,800 (47 x £400) is transferred to COS.
- The remaining 3 bags are recognised as an asset (the right to recover the bags) at cost
£1,200 (3 x £400). The 'right to recover' asset is measured at the original cost of the
bags that are expected to be returned because, even in the February sale, they are
capable of being sold for £425 (50% x £850) i.e., more than cost.
- The required journal entries are:
DR Bank (50 x £850) £42,500
CR Revenue £39,950
CR Refund liability £2,250
To recognised the sale of bags and expectation that 6% will be returned.
DR Asset (right to recover inventory) £1,200
DR COS (47 x £400) £18,800
CR Asset (inventory) (50 x £400) £20,000
Guarantee of replacement device
This is a multi-element sale and it needs to be determined whether there is a
market price for the guarantee element - which would require separate
recognition.
- As no revenue is recognised at 30-Jun-X4 the adjustment for guarantees, if
any, would be made at the YE.
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