On November 20, Routledge Publishing prints 4,000 copies of an accounting textbook. In December, Routledge Publishing ships 1,000 copies to various bookstores, who have the right to return the books if they can't sell them within three months. Historically, the bookstores typically return 4% of the books. Under GAAP, what is the correct accounting for these events?
A) Routledge should record revenues related to 4,000 books in November, when it prints them.
B) Routledge should record revenues in December for 1,000 books, and an allowance for sales returns of 4% of the sales.
C) Routledge should record revenues in December for 1,000 books, and wait until later to record any sales returns.
D) Routledge should wait until after the three-month return period before recording any revenues.

Question

Quizplus · Accepted Answer

Under GAAP, revenue should be recognized when the product is shipped or delivered, which in this case is in December for the 1,000 copies sent to the bookstores. However, since the bookstores have the right to return unsold books, Routledge should also record an allowance for sales returns based on the historical return rate of 4%. This means that they should estimate that 4% of the 1,000 copies shipped to bookstores will be returned and adjust their revenue accordingly. Waiting to record sales returns until later would not follow the matching principle of GAAP, which requires that expenses and revenues be recognized in the same period. Waiting until after the three-month return period to record revenue would also not accurately reflect the company's financial position during the period in which the books were sold.

On November 20, Routledge Publishing Prints 4,000 Copies of an Accounting