PART 1

Employees at your company disagree about the accounting for sales returns. The sales manager believes that granting more generous return provisions can give the company a competitive edge and increase sales revenue. The controller cautions that, depending on the terms granted, loose return provisions might lead to non-GAAP revenue recognition. The company CFO would like you to research the issue to provide an authoritative answer.

(a)What is the authoritative literature addressing revenue recognition when right of return exists?

(b)What is meant by “right of return”? “Bill and hold”?

(c)Describe the accounting when there is a right of return.

(d)When goods are sold on a bill-and-hold basis, what conditions must be met to recognize revenue upon receipt of the order?

Consider the sales manager’s position and the CFOs position.

Present both sides and come to a consensus as to the best position. Defend your decision.

Part 2

Additionally, the CFO at this company has asked for your guidance in evaluating leases.

Write a 350 word memo on this topic, specifically on how to determine whether substantially all of the risks and rewards of ownership are transferred in the lease. Address how “substantially all” is defined in the authoritative literature.

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