Question

Uddin Publishing Co. publishes college textbooks that are sold to bookstores on the following terms. Each title has a fixed wholesale price, terms f.o.b. shipping point, and payment is due 60 days after shipment. The retailer may return a maximum of 30% of an order at the retailer’s expense. Sales are made only to retailers who have good credit ratings. Past experience indicates that the normal return rate is 12%. The costs of recovery are expected to be immaterial, and the textbooks are expected to be resold at a profit.

Instructions

(a) Identify the revenue recognition criteria that Uddin could employ concerning textbook sales.

(b) Briefly discuss the reasoning for your answers in (a) above.

(c) On July 1, 2017, Uddin shipped books invoiced at \(15,000,000 (cost \)12,000,000). Prepare the journal entry to record this transaction.

(d) On October 3, 2017, \(1.5 million of the invoiced July sales were returned according to the return policy, and the remaining \)13.5 million was paid. Prepare the journal entries for the return and payment.

(e) Assume Uddin prepares financial statements on October 31, 2017, the close of the fiscal year. No other returns are anticipated. Indicate the amounts reported on the income statement and balance related to the above transactions.

Short answer

Uddin must record its revenue at the time of sale.

Step-by-step solution

Meaning of Cost of Recovery

Cost recoveryis an accounting approach in which revenue is recognized by the company from a transaction after the customer paid enough of the invoice that the company has recovered all of thetransaction's expenses.

Revenue recognition criteria and Journal entries for Uddin Publishing Co.

1. Because the books are sold f.o.b. shipping point, Uddin might record revenue at the point of sale depending on the time of shipment. That is, control has been transferred, and the company's performance obligation has been fulfilled. Recognition occurs at the moment of sale since the returns may be calculated (shipping point).

1. The right approach, based on the available facts, is to record revenue when the performance obligation is met - in this example, at the time of shipping (transfer of title). Other indicators of control appear to be met, including (1) Uddin's right to payment (2) Uddin's transfer of physical possession of the asset, (3) the bookstore's significant risks and rewards of ownership, (4) the bookstore's acceptance of the textbooks, and (5) the bookstore's likelihood of collection.

1. Journal entries:

Date	Particular	Debit ($)	Credit ($)
July 1, 2017	Accounts receivables a/c	15,000,000
	Sales revenue a/c		15,000,000
July 1, 2017	Cost of goods sold a/c	12,000,000
	Inventory a/c		12,000,000

1. Journal entries:

Date	Particular	Debit ($)	Credit ($)
October 3, 2017	Sales returns and allowances	1,500,000
	Accounts receivables a/c		1,500,000
October 3, 2017	Returned inventory a/c	1,200,000
	Cost of goods sold a/c		1,200,000
			240,000
October 3, 2017	Cash a/c	13,500,000
	Accounts receivables a/c		13,500,000

1. Income statement and balance sheet

Income Statement

Particular	Amount ($)
Sales revenue	15,000,000
Less: Sales returns and allowances	(1,500,000)
Net sales	13,500,000
Cost of goods sold	(960,000)
Gross profit	12,540,000

Balance Sheet

Current Asset	Amount ($)
Accounts receivables	13,500,000
Inventory	960,000
Total	14,460,000