Question

Roxio, Inc., is a leading provider of digital media software and services for the consumer market. The company provides software that enables individuals to record digital content onto CDs and DVDs and offers photo and video editing products. Roxio’s Form 10-K for the year ended March 31, Year 3, reported the following information:


Business Risks
We rely on distributors and retailers to sell our products. If our distributors attempt to reduce their levels of inventory or if they do not maintain sufficient levels to meet customer demand, our sales could be negatively impacted. If we reduce the prices of our products to our distributors, we may have to compensate them for the difference between the higher price they paid to buy their inventory and the new lower prices. In addition, we are exposed to the risk of product returns from distributors through their exercise of contractual return rights.

Revenue Recognition
For software product sales to distributors, revenues are recognized on product shipment to the distributors or receipt of the products by the distributor, depending on the shipping terms, provided that all fees are fixed or determinable, evidence of an arrangement exists, and collectibility is probable. Our distributor arrangements provide distributors certain product rotation rights. Additionally, we permit our distributors to return products in certain circumstances, generally during periods of product transition. End users additionally have the right to return their product within 30 days of the purchase. We establish allowances for expected product returns in accordance with FASB ASC Section 605-15-25. These allowances are recorded as a direct reduction of revenues and accounts receivable. Management applies significant judgment and relies on historical experience in establishing these allowances. If future return patterns differ from past return patterns due to reduced demand for our product or other factors beyond our control, we may be required to increase these allowances in the future and may be required to reduce future revenues. If at any point in the future we become unable to estimate returns reliably, we could be required to defer recognizing revenues until the distributor notifies us that the product has been sold to an end user. We provide for estimated product returns and pricing adjustments in the period in which the revenues are recognized.

Required:
1. Re-create (in summary form) the journal entries Roxio made in the Allowance for sales returns and certain sales incentives account for fiscal years Year 1–Year 3. Explain the rising balance in this account.
2. Are opportunities for “earnings management” present in Roxio’s stated accounting policies for expected product returns? Is there any evidence in the data presented that Roxio’s management has availed themselves of any of the opportunities you identify?
3. Determine Roxio’s gross revenues for fiscal years Year 1–Year 3.



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  • CreatedSeptember 10, 2014
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