Question

Monty Company sells 329 units of its products for $21 each to Logan Inc. for cash. Monty allows Logan to return any unused product within 30 days and receive a full refund. The cost of each product is $13. To determine the transaction price, Monty decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the probability-weighted amount. Using the probability-weighted amount, Monty estimates that (1) 9 products will be returned and (2) the returned products are expected to be resold at a profit.

(a) Indicate the amount of Net sales.

Net sales

$

(b) Indicate the amount of estimated liability for refunds.

Liability for Refunds

$

(c) Indicate the amount of cost of goods sold that Monty should report in its financial statements (assume that none of the products have been returned at the financial statement date).

Cost of Goods Sold

Answer 1

(a) Given that Monty company has sold 329 units to Logan Inc at the rate of $21 each for cash.

Therefore the amount of gross sales is

Gross sales = units sold × price of each unit

Gross sales. = 329 × 21

= $6909

Net sales = Gross sales - Returns made by Logan

= $6909 - 9 × 21

= $6909 - 189

Net sales = $6720

(b) The amount of estimated liability for refunds is the number of units expected to be returned multiplied by price at which it is sold.

Estimated liability = 9× $21

= $189

(* Number of units expected to be returned = 9; price = $21)

(c) The amount of cost of goods sold that Monty should report in financial statements assuming that none of the products have been returned at the financial statement date will be

Cost of goods sold = number of units × cost of each unit

= 329 × $13

Cost of goods sold = $4277