When rights of return exist, or are likely to be accepted, _______.
A)the firm should simply expense them as incurred
B)should restrict cash to cover any potential right of return or warranty claim
C)a reasonable estimate of refunds should be made when revenue is recognized.
D)a company should consult with other firms in the industry with respect to best practices

Question

Quizplus · Accepted Answer

When rights of return exist or are likely to be accepted, a reasonable estimate of refunds should be made when revenue is recognized. This estimate should be based on the historical pattern of returns and the current economic environment. This ensures that revenue is accurately reported in the financial statements and that the potential liability associated with returns is appropriately recorded. Option A is incorrect because it assumes that the expenses associated with returns have already been incurred, which may not be the case. Option B is incorrect because it suggests restricting cash to cover potential returns, which may not be necessary or cost-effective. Option D is incorrect because while it is always good practice to seek input from others in the industry, best practices may vary depending on the specific circumstances.

When Rights of Return Exist, or Are Likely to Be