Santos Company allows a liberal return privilege on its normal sales.Products purchased by customers may be returned within 90 days of purchase if in resalable condition,for a full refund.The following information relates to 2014:

Assuming that all criteria of SFAS No.48,"Revenue Recognition When Right of Return Exists," are not met,what is the gross margin to be reported by the company in 2014?
A)$4,000
B)$10,000
C)$40,000
D)$2,000

Question

Santos Company allows a liberal return privilege on its normal sales.Products purchased by customers may be returned within 90 days of purchase if in resalable condition,for a full refund.The following information relates to 2014:

Assuming that all criteria of SFAS No.48,"Revenue Recognition When Right of Return Exists," are not met,what is the gross margin to be reported by the company in 2014?
A)$4,000 
B)$10,000 
C)$40,000 
D)$2,000

Quizplus · Accepted Answer

According to the information given in the question, since all the criteria of SFAS No.48 are not met, the company cannot recognize revenue until the return privilege has expired. Therefore, the gross margin to be reported by the company in 2014 would be the amount of cost of goods sold incurred during the year, which is $10,000. The cost of goods sold is calculated by subtracting the ending inventory from the beginning inventory and adding the purchases made during the year, i.e., ($20,000 - $8,000 + $12,000 = $24,000) - ($14,000 - $4,000 + $6,000) = $10,000.

Santos Company Allows a Liberal Return Privilege on Its Normal