Question

Kristin Company sells 300 units of its products for \(20 each to Logan Inc. for cash. Kristin allows Logan to return any unused product within 30 days and receive a full refund. The cost of each product is \)12. To determine the transaction price, Kristin decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the probability-weighted amount. Using the probability-weighted amount, Kristin estimates that (1) 10 products will be returned and (2) the returned products are expected to be resold at a profit. Indicate the amount of (a) net sales, (b) estimated liability for refunds, and (c) cost of goods sold that Kristen should report in its financial statements (assume that none of the products have been returned at the financial statement date).

Short answer

Net sales is $5,800

Estimated liability for refundsis$200

Cost of goods sold is $3,480

Step-by-step solution

Cost of Goods Sold

The entire amount an organization spends as a cost directly tied to the selling of products is known as the cost of goods sold. It includes the things acquired for selling products such as raw materials, packaging, and direct labor associated with making or selling the good, depending on the firm.

Calculate net sales, estimated liability for refunds, cost of goods sold

(a) Net Sales:

Units sold to Logan Inc. = 300 units

Units returned to Kristin company = 10 units

Price of each unit = $20

$\begin{array}{rcl}\mathrm{Net}\mathrm{sales}& =& \left(\mathrm{Units}\mathrm{sold}-\mathrm{Units}\mathrm{return}\right)\times \mathrm{Price}\mathrm{per}\mathrm{unit}\\ & =& \left(300-10\right)\times \$20\\ & =& 290\times \$20\\ & =& \$5,800\end{array}$

(b) Estimated liability for refunds:

Units returned = 10 units

Price of each unit = $20

$\begin{array}{rcl}\mathrm{Estimated}\mathrm{liability}\mathrm{for}\mathrm{refunds}& =& \mathrm{Units}\mathrm{returned}\times \mathrm{Price}\mathrm{per}\mathrm{unit}\\ & =& 10\times \$20\\ & =& \$200\end{array}$

(c) Cost of goods sold:

Units sold to Logan Inc. = 300 units

Units returned to Kristin company = 10 units

Cost of each unit = $12

$\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}& =& \left(\mathrm{Units}\mathrm{sold}-\mathrm{Units}\mathrm{return}\right)\times \mathrm{Cost}\mathrm{per}\mathrm{unit}\\ & =& \left(300-10\right)\times \$12\\ & =& 290\times \$12\\ & =& \$3,480\end{array}$