Huang Industries, Ltd. (HIL) is based in Singapore and manufactures tools used in Asian auto factories. Shanghai Automotive Industry Corporation (SAIC) purchased $60 million worth of tools from HIL in a single order that was delivered on June 30, the last day of HIL’s second fiscal quarter. SAIC may return any portion of the order within three months of delivery for a full refund. HIL’s experience with product returns suggests that products that are returned are generally in good enough condition to be restored to inventory and sold at a later date. 

SAIC is a long-term customer that aggressively takes advantage of product return rights but is consistent in its behavior. HIL’s accountants estimate that 10 percent of the products shipped to SAIC will eventually be returned. 

Part A. Assume that HIL’s gross margin percentage is always 30 percent. 

Required: How much pretax profit should HIL recognize on the sale in the second fiscal quarter? 

Part B. Assume SAIC returned 9 percent of the shipment on September 12. It did not return any additional product before the right of return expired. 

Required: 

Compute the effect of the sale on HIL’s pretax income in the third fiscal quarter. Your answer should include the effect of the product return on September 12 as well as the expiry of the right of return on September 30.