SOLUTIONS TO EXERCISES

SOLUTIONS TO EXERCISES

EXERCISE 18-1 (15-20 minutes)

(a)   Huish could recognize revenue at the point of sale based upon the time of shipment because the books are sold f.o.b. shipping point. Because of the return policy one might argue in favor of the cash collection basis. Because the returns can be estimated, one could argue for shipping point less estimated returns.

(b)   Based on the available information and lack of any information indi­cating that any of the criteria in FASB Statement No. 48 were not met, the correct treatment is to report revenue at the time of shipment as the gross amount less the 12% normal return factor. This is supported by the legal test of transfer of title and the criteria in FASB No. 48.   One could be very conservative and use the 30% maximum return allowance.

(c)   July Sale Entry.

        Accounts Receivable.....................................     16,000,000

        Allowance for Returns...................................                                 1,920,000

          ($16,000,000 X 12%)

        Sales Revenue—Texts..................................                               14,080,000

(d)   October Collection.

        Cash..................................................................     14,000,000

        Sales Revenue—Texts*.................................            80,000

        Allowance for Returns...................................       1,920,000

        Accounts Receivable.....................................                               16,000,000

        *A debit to either Sales Revenue—Texts or Sales Returns could be made here.