Videos
Ethics and Sales Returns
At the end of 2019, the accounting firm for which you work is auditing the books of Debitus Publishing Inc. for the first time. Debitus, a calendar year company, publishes textbooks that are used in colleges and universities across the country. These textbooks are purchased by students through their campus bookstores. Debitus normally makes its biggest sales at the beginning of the fall semester. In the past, Debitus has always recorded sales returns in the spring semester when the campus bookstores return any unsold textbooks. This has been satisfactory because the returns have been immaterial in amount.
In 2018, as a promotional strategy to stimulate sales, Debitus began offering bookstores a reduced price if they ordered more textbooks. There is no penalty for returns of these textbooks if the bookstores cannot sell them to customers. This strategy worked; sales increased by 10% during 2018. In early 2019, however, a substantial amount of unsold textbooks were returned by bookstores to Debitus. Continuing the promotional strategy, sales increased by 15% during 2019.
While reviewing the sales returns account for 2019, you notice that the only entry was for the textbooks returned earlier in the year. You note that these returns amounted to about 5% of the sales for the fall semester of 2018. Because this pattern of returns seems to you to be a trend that will continue, you raise the issue with the company controller as to whether all of the “sales” for the fall semester of 2019 are actually revenue. The controller responds, “Of course tiiey are revenue; we sold the textbooks. Just because there will some returns doesn’t mean we haven’t made sales. Besides, we don’t know what percentage the returns will be. They might be as much as 5%, but definitely not more. Furthermore, we have already recorded all those returns at the beginning of 2019 that really applied to 2018. So we already have recorded our fair share of returns for 2019. As long as we record returns consistently, it will all work out. We don’t want a drop in earnings for 2019 because of a change in customer returns, our shareholders wouldn’t like that. Let’s just leave this issue alone.”
Required:
From financial reporting and ethical perspectives, what do you think about Debitus’s policy in regard to sales returns?
Want to see the full answer?
Check out a sample textbook solution
Chapter 6 Solutions
Intermediate Accounting: Reporting And Analysis
- Provide correct solution for this general accounting questionarrow_forwardFinancial Accounting Problem: Assume that Complex Co. had credit sales of $536,000 and cost of goods sold of $190,000 for the period. Complex uses the aging method and estimates that the appropriate ending balance in the Allowance for Doubtful Accounts is $4,200. Before the end-of-period adjustment is made, the Allowance for Doubtful Accounts has a credit balance of $375. What amount of Bad Debt Expense would the company record as an end-of-period adjustment?arrow_forwardGiven answer financial accountingarrow_forward
- Veer Trucking raised $280 million in new debt and used this to buy back stock. After the recap, Veer's stock price is $7. If Veer had 65 million shares of stock before the recap, how many shares does it have after the recap? HELParrow_forwardA manufacturer reports the following information on rits product. Solve this question general Accountingarrow_forwardRecognize for year one ? General accountingarrow_forward
- Give true answer the accounting questionarrow_forwardAnswer? ? Financial accountingarrow_forwardTD Company has a budget with sales of 10,800 units and $4,500,000. Variable costs are budgeted at $1,950,000, and fixed overhead is budgeted at $790,000. What is the budgeted manufacturing cost per unit? Solve the problemarrow_forward
- It's average leval of receivables?arrow_forwardA company recorded $4,900 of depreciation on its factory building. Prepare the general journal entry to record this transaction. Solutionarrow_forwardAt the end of the year, Tahir Incorporated's balance for Allowance for Uncollectible Accounts is $6,900 (debit) before adjustment. The company estimates future uncollectible accounts to be $11,600. What is the adjustment Tahir would record for Allowance for Uncollectible Accounts? Answer this financial accounting Question.arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT
Auditing: A Risk Based-Approach to Conducting a Q...AccountingISBN:9781305080577Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:South-Western College PubPrinciples of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College