Below you will find two situations involving revenue recognition related to separate divisions of the Jamestown Corporation, the paperback book division and the alarm systems division. For each situation:
‘ Explain the revenue recognition issue presented. Provide codification references.
‘ Compute the revenue to be recognized in the fiscal year ended November 30, 2012.
Situation 1: Paperback book division
The paperback book division sells large quantities of novels to a few book distributors that in turn sell to several national chains of bookstores. The division allows distributors to return up to 30% of sales, and distributors give the same terms to bookstores. While returns from individual titles fluctuate greatly, the returns from distributors have averaged 20% in each of the past 5 years. A total of $7,000,000 of paperback novel sales were made to distributors during the fiscal year ended November 30, 2012. On November 30, 2012, $2,200,000 of fiscal 2012 sales was still subject to return privileges over the next six months. The remaining $4,800,000 of fiscal 2012 sales had actual returns of 21%. Sales from fiscal 2011 totaling $2,500,000 were collected in fiscal 2012, with less than 18% of sales returned. All of the criteria for revenue recognition when the right of return exists are applicable to the paperback book division.
Situation 2: The alarm systems division works through manufacturers’ agents in various cities. Orders for alarm systems and down payments are forwarded from agents and the division ships the goods f.o.b. shipping point. Customers are billed for the balance due plus actual shipping costs. The firm received orders for $6,000,000 of goods during the fiscal year ended November 30, 2012. Down payments of $600,000 were received, and $5,000,000 of goods were billed and shipped. Actual freight costs of $100,000 were also billed. Commissions of 10% on product price were paid to manufacturers’ agents after the goods were shipped to customers. Such goods are warranted for 90 days after shipment, and warranty returns have been about 1% of sales. Revenue is recognized at the point of sale by the alarm division.
f. Assume that you are the corporate controller for Jamestown Corporation. Write a business memo, in good form to President Jeffrey Simmons explaining the accounting issues involved in the two situations. Your memo should not exceed one typewritten page.