On September 1, 2021, Electric Depot sold 100 laptop computers at $750 each with a 120-day unconditional right of return. Customers have 90 days to pay. Based on past experience, Electric Depot estimates that approximately 1% will be returned. Which of the following is TRUE regarding Electric Depot's December 31, 2021 financial statements?

Question

Quizplus · Accepted Answer

According to the revenue recognition principle, revenue should be recognized when it is earned and the payment is reasonably assured. In this case, Electric Depot sold 100 laptops for $750 each, resulting in total revenue of $75,000. However, since the customers have a 120-day unconditional right of return, the revenue cannot be recognized until this period has elapsed. Therefore, option A is incorrect.

Additionally, since customers have 90 days to pay, the revenue cannot be recognized until payment is reasonably assured. Therefore, option D is incorrect.

Regarding the estimate of returns, Electric Depot estimates a return rate of 1%. Therefore, it is reasonable to assume that out of the 100 laptops sold, 1 will be returned. This means that the actual revenue earned is $74,250 ($75,000 - $750 for the estimated return).

According to the matching principle, a provision for refund liability should be established at the time of sale, and this amount should be deducted from the total revenue. Therefore, option B is correct. By establishing a provision for refund liability of $750 at the time of sale, the net revenue recognized in September 2021 will be $74,250.

Option C is incorrect because revenue cannot be recognized until the right of return period has elapsed, even if it is estimated that only 1% of units will be returned.

On September 1, 2021, Electric Depot Sold 100 Laptop Computers