Question

Gunk Goblin sells vacuums and just launched a policy where customers have the right to return a vacuum during a three-year period following purchase. Gunk management has no experience under this sort of policy and does not believe it can accurately estimate returns. What is the longest period of time that Gunk may have to wait before recognizing revenue associated with one of these sales?

Answer 1

Answer:

3 years after the right of return has expired

Explanation:

Generally accepted accounting principles (GAAPs) specify the scenario wherein revenue is to be recognized.

As per the accrual principle, revenue is to be recognized when earned and not when actual cash is received against it.

In the given case, the company allows it's customers to return the products sold within a period of three years. Hereby, the company must make a provision for contingency against future returns.

Here, the business should be able to estimate the number of vacuums that would be returned. Here, the company is unable to do so owing to no past record or history.

Hence, the company may have to wait till maximum period of 3 years i.e the time when products can no longer be returned, for recognizing revenue associated with the sales.