Question

Finerly Corporation sells cosmetics through a network of independent distributors. Finerly shipped cosmetics to its distributors and is considering whether it should record $300,000 of revenue upon shipment of a new line of cosmetics. Finerly expects the distributors to be able to sell the cosmetics, but is uncertain because it has little experience with selling cosmetics of this type. Finerly is committed to accepting the cosmetics back from the distributors if the cosmetics are not sold. How much revenue should Finerly recognize upon delivery to its distributors?

Answer 1

Answer: $0

Explanation:

When there is an expectation of reversal of the goods back to the company due to factors arising from a delay in the delivery of the goods or other factors that could not be controlled, the revenue recognized should be $0.

In this scenario, Finerly is uncertain about the ability of the goods to be sold by the distributors and is committed to accepting the cosmetics should they not sell.

As they have little experience which means that they will be unable to control much unforeseen factors, there is an expectation of reversal so revenue should be recognized at $0 on delivery. Revenue will only be recognized after sales.