Fenn Stores, Inc. had sales of $1,000,000 during December. Experience has shown that merchandise equaling 7% of sales will be returned within 30 days and an additional 3% will be returned within 90 days. Returned merchandise is readily resalable. In addition, merchandise equaling 15% of sales will be exchanged for merchandise of equal or greater value. What amount should Fenn report for net sales in its income statement for the month of December?
a. $780,000
b. $850,000
c. $750,000
d. $900,000
Answer:D
Choice "d" is correct. When sales returns can be estimated, a decrease in revenue with a debit to the allowance for sales returns is made. 10% returns are expected. $1,000,000 less 10% is $900,000. Expected exchanges do not affect net sales or inventory or cost of sales. The earnings process is complete for the exchanges. SFAS 48 para. 3,4.
Choice "b" is incorrect. Net sales should reflect estimated sales returns but not exchanges.
Choice "a" is incorrect. Net sales should be reduced by 10% as the allowance for returns, but should not be reduced for exchanges.
Choice "c" is incorrect. Net sales should reflect estimated sales returns but not exchanges.