Case Study: Trademark Inc.
Trademark, Inc. Part I - Accounting Issues
(Case #2)
Background
Trademark Incorporated designs, manufactures, and distributes gift merchandise. Trademark manufactures its goods in five plants across the United States and operates through four divisions: Greeting Cards and Stationery, Calendars, Party Goods, and Specialty Gifts. In addition, Trademark also owns a Swiss company that manufactures similar products in Western Europe. The Swiss company operates as a separate, wholly-owned subsidiary. Trademark began operating in 1981 and offered their stock to the public in 1992.
Issues
1- Are revenue and cost of sales understated by not applying the correct percentage of right of return for damaged goods?
2- For other returns, if there is no legal right to return the merchandise nor the ability to make a reasonable estimate, should the company recognize the revenue or defer it?
Analysis for Issue 1 - Return of Damaged Goods
Regulation ASC, Rule 605-15-25-1 states:
If an entity sells its product but gives the buyer the right to return that product, revenue from the sales transaction shall be recognized at time of sale only if all of the following conditions are met:
a. The seller 's price to the buyer is substantially fixed or determinable …show more content…
In this case, the requirements of 605-15-25-1 are not met because the case clearly states the customers do not have the legal right of return. In the case, Nancy came up with an estimate of maximum possible returns. 605-10-S99 indicates if a company cannot estimate returns but can estimate maximum returns, they should not recognize revenue in excess of maximum returns from selling products subject to a right of return. However, in this case there is no right to return, so the company would not be prohibited from recognizing the
(Case #2)
Background
Trademark Incorporated designs, manufactures, and distributes gift merchandise. Trademark manufactures its goods in five plants across the United States and operates through four divisions: Greeting Cards and Stationery, Calendars, Party Goods, and Specialty Gifts. In addition, Trademark also owns a Swiss company that manufactures similar products in Western Europe. The Swiss company operates as a separate, wholly-owned subsidiary. Trademark began operating in 1981 and offered their stock to the public in 1992.
Issues
1- Are revenue and cost of sales understated by not applying the correct percentage of right of return for damaged goods?
2- For other returns, if there is no legal right to return the merchandise nor the ability to make a reasonable estimate, should the company recognize the revenue or defer it?
Analysis for Issue 1 - Return of Damaged Goods
Regulation ASC, Rule 605-15-25-1 states:
If an entity sells its product but gives the buyer the right to return that product, revenue from the sales transaction shall be recognized at time of sale only if all of the following conditions are met:
a. The seller 's price to the buyer is substantially fixed or determinable …show more content…
In this case, the requirements of 605-15-25-1 are not met because the case clearly states the customers do not have the legal right of return. In the case, Nancy came up with an estimate of maximum possible returns. 605-10-S99 indicates if a company cannot estimate returns but can estimate maximum returns, they should not recognize revenue in excess of maximum returns from selling products subject to a right of return. However, in this case there is no right to return, so the company would not be prohibited from recognizing the