Vitamins R Us developed a new 100%-organic multivitamin, Vita X, which is more easily absorbed by the body. Vita X is significantly more expensive than other vitamins on the market. In order to promote the product, Vitamins R Us shipped 50,000 bottles of Vita X, FOB destination, to retailers during December 2013. Retailers can return any Vita X not sold by March 31, 2014. As an added incentive, the retailers do not have to pay Vitamins R Us for any bottles of Vita X that they do not return to Vitamins R Us until March 31, 2014.
The selling price of the vitamins to the retailers is $45 per bottle. Vitamins R Us has not had previous promotions of this nature. Vitamins R Us has a December 31 fiscal year end.
The company's bookkeeper recognized the revenue on the vitamins when the vitamins were shipped to the retailers and made the following entry:
Accounts Receivable........................................2,250,000
Sales................................................................................2,250,000
Instructions
(a) Indicate whether you agree or disagree with the bookkeeper's decision to recognize revenue when the vitamins were shipped. Support your answer with reference to the revenue recognition criteria.
(b) Indicate when the revenue for Vita X should be recognized.
Taking It Further
Would your answers to (a) and (b) be different if Vitamins R Us had previously used the same promotion for Vita X and only 10% of the product was returned to Vitamins R Us? Explain your answer.