Special Issues in Revenue Recognition

Question 1

What are some examples of special recognition issues?

Answer 1

Warranties 
Sales with right of return 
Consignment 
Nonrefundable upfront fees 
bill and hold arrangements
Principal-Agent Considerations

Question 2

What are the two major types of warranties

Answer 2

Assurance- guaranteed defects comes along with the purchase

Service-Type (extended): Distinct warranty obligation

Question 3

Example of extended warranty: A firm’s totaled $3,000,000 for the year. That figure INCLUDED $150,000 for two year extended service type warranty contracts covering the goods sold.

Record the journal entry:

Answer 3

Cash 3,000,000
Sales Revenue 2,850,000 CR
Unearned Warranty Rev 150,000 CR

During the year, 20,000 of warranty costs were incurred

Warranty Expense 20,000
Cash, Inventory, Other (20,000)

Straight line the revenue of $150,000

Question 4

What is a sale with the right of return?

Answer 4

Contract term that allows for customer to return.

Seller recognizes revenue in the amount to which they expect to be entitled.

Sales return and allowances DB
Allowance for sales returns and allowances CR
(contra asset to AR)

Estimated Inventory Return DB
Cost of goods sold CR

Question 5

What are bill and hold?

Answer 5

Bill and hold the seller retains physical possession of goods for substantive reason. If the seller sets them aside; there has to be a substantive reason. There needs to be a good reason.