Question

1. Look at ASC 605-15-25 Recognition General>  Sales of Product when Right of Return Exists and describe what factors should be considered when deciding how much revenue should be recognized in a period if a product is sold and the customer has a right of return.

Answer 1

When a product is sold than it might be sold with a condition that the product can be returned within certain period of time. The time depends upon the mutual understanding or predetermined in the sales contracts.

Now if the product is sold than this is a sales but these sales can be reverted back to zero if all the products that are sold are returned by the customer. SO in this case the books may not give fair view about the actual revenue.

To counter such situation ASC 605-15-25 was enacted and as per this section, a seller may record sales at the time of selling a product but at the same time an allowance for the returns of the product should be made. This allowance will be used if some of the products are returned by the customer.

Now the question is what should be the amount that should be booked in this provision if there is sale?

The answer is that a reasonable amount should be booked if the product that is sold is with a condition to return.

The amount depends upon the below factors.

• The length of product return period.
• Competition in market, this means that is superior product exists.
• Product suspectibity to obsolesce
• If the product is new or old to market.
• The trust and loyalty of customer to product.

If in case the above factors cannot be evaluated with reasonable accuracy then the sales should be booked only at the end of the product return period is over.