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: Average gross profit percentage 25%
Total sales (including actual returns) $100,000
Actual returns $ 15,000
Historical ratio of actual returns to sales 20%
Sales whose return privilege has expired at
The end of 2014 (does not include actual
Returns) $ 40,000
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

Quizplus · Accepted Answer

The company cannot recognize revenue for sales with return privileges until the return privilege has expired or it is unlikely that a return will be made. Therefore, the company can only recognize revenue for sales that occurred in 2014 but have not yet had their return privilege expire. This amount would be calculated as follows:

Total sales (including actual returns) = $100,000 
Less: Actual returns = $15,000 
Net sales = $85,000

Sales whose return privilege has expired at the end of 2014 = $40,000

Therefore, the revenue that can be recognized for 2014 is $40,000.

Gross margin can be calculated as follows:

Net sales - Cost of goods sold = Gross margin

We know that the average gross profit percentage is 25%, so we can calculate the cost of goods sold:

Net sales x (100% - Average gross profit percentage) = Cost of goods sold

$40,000 x 75% = $30,000

Therefore, the gross margin for 2014 is:

$40,000 - $30,000 = $10,000

Santos Company Allows a Liberal Return Privilege on Its Normal