During the course of wrapping up the 2014 audit of your firm’s client, Best Appliances, Inc., you discover the following sales activity that occurred in late December 2014. Best Appliances has recorded sales for 280,000 appliances for the month of December. This amount is similar to the prior year’s December sales. The revenue for December sales activity was booked at year-end even though payment had not yet been received.

Best Appliances, an accrual basis entity, manufactures major appliances for sale to major retail stores and home repair chains. Best Appliances sells these appliances to nine different retail stores and home repair store chains. These sales contain a 120 day right of return. Best Appliances has never received any appliances back since it started operations in 1977. In addition to the right of return clause, Best Appliances has guaranteed to undertake an extensive $15,000,000 national advertising campaign to promote the high quality and dependability of the major appliances it sells to retail stores and home repair chains. Your audit manager has requested information from you regarding the appropriateness of the booking of the revenue related to December sales.

Prepare a 1-1 ½ page memo to the file for your audit manager. Don’t forget to cite your authority (FASB Codification cites) for your conclusions.

Answer rating: 100% (QA)

The booking of revenue is different in case of sales made with a right of return clause as compared ... View the full answer