XYZ, Inc. sold 100 widgets to ABC, Inc. on 1/1/18 for $50 per widget on account. The sales agreement allows ABC to return widgets that they are unsatisfied with or exceed their needs within 30 days of the sale. The widgets cost XYZ $30 to produce. XYZ doesn’t anticipate any material cost of restocking the inventory nor any inability to resell them at $50 per unit. ABC expects that 10 widgets will be returned within the return period.

Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Chapter17: Advanced Issues In Revenue Recognition
Section: Chapter Questions
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XYZ, Inc. sold 100 widgets to ABC, Inc. on 1/1/18 for $50 per widget on account. The sales agreement allows ABC to return widgets that they are unsatisfied with or exceed their needs within 30 days of the sale. The widgets cost XYZ $30 to produce. XYZ doesn’t anticipate any material cost of restocking the inventory nor any inability to resell them at $50 per unit. ABC expects that 10 widgets will be returned within the return period. 

Discuss the criteria for recognizing sales returns and allowances covered in the text and determine whether this arrangement meets the requirements

Record the journal entry for the sale on 1/1/18.

ABC returned 5 widgets on 1/18/18. Record the journal entry for this event.

XYZ prepared a balance sheet on 1/31/18. Record any journal entries that they would need make prior to preparing their financial statements.

Show how their accounts receivable and related accounts would be reported on that balance sheet.

Show how the sales and gross profit section of that income statement would be presented

 

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