The following facts pertain to the year ended December 31, 2014, of Grosse Pointe Corporation, a manufacturer of power tools.
1. Based on year-to-date sales through early December, management projected 2014 sales to be 5% below their forecast target for the year.
2. The 2014 sales forecast included projected sales of a new string trimmer that it introduced late in the third quarter of 2014; unfortunately for Grosse Pointe, actual customer orders for the new product through early December had been disappointing.
3. Effective December 15, 2014, Grosse Pointe began providing the following incentives to boost sales of the new string trimmer: (a) normal 2y10, ny30 payment terms were extended to ny90 and (b) full right of return for 90 days was granted on all trimmers purchased during the last two weeks of December.
4. Grosse Pointe has never before been forced to offer such incentives and thus has no basis for estimating return rates or default rates on these sales.
5. Sales of the new trimmer for October 1 to December 15, 2014, were $1,265,000.
6. The marketing department began aggressively promoting the new trimmer by stressing the incentives’ “no-risk” nature (“if you can’t sell them, just return them”) and generated sales for December 15 to 31, 2014, of $2,391,000. Management included all of this revenue to make the company’s sales target for 2014. Grosse Pointe uses a perpetual inventory system and charged $1,650,000 to Cost of goods sold when these sales were made.

1. Is Grosse Pointe correct to recognize the incentive sales and related accounts receivable in 2014? Explain.
2. If Grosse Pointe’s auditors do not concur with management’s desired accounting treatment, what correcting entries are needed?

  • CreatedSeptember 10, 2014
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