Question

FlexMotors, Inc. manufactures a variety of electronic drills and grass cutters. Recently, it introduced a new line of handheld drills that generates much less noise and consumes much less energy, but carries a much higher price tag. The company is currently considering whether it should record $1,2 million of revenue upon shipment. Under the contract, FlexMotors is obligated to accept any products from the distributors if they are not sold within 6 months. The company is confident that the new model will sell, but is unable to accurately estimate returns, because it has never sold anything quite like it.

How much revenue should FlexMotors recognize upon shipment to distributors?

Answer 1

Flex Motors has introduced the new product where the terms of the contract is such that in case the sale of goods will not happen in next 6 months the product will be returnable.

In this regard, company must record the revenue as the goods are dispatched and the risk is transferred from the Flex Motors to distributor. Only case where the goods will be returned to Flex Motors is that in case the sale will not happen in next 6 months the goods will be returned back to company. Company is selling the product for the first time and they do not have any past record of rejection for which the contingencies may be accounted in the books for rejection of sale. For lack of such details, it is advisable to record the full revenue where the company can make reliable estimate of selling the product with in 6 months and in case the goods are not sold the contingency provision may be created in future.

Considering the above , it is advisable to record the full revenue of $ 1.2 in the books immediately.