Sea Soft Water Company

In: Business and Management

Submitted By lucywhite
Words 417
Pages 2
Case 1: Sea-Soft Water Company

The Sea-Soft Water Company distributes its water softeners to dealers upon their request. The contract agreement states that dealers may have 90 days to sell and pay for the softeners. Until the 90-day period is over, any softeners may be returned at the dealer's expense and with no further obligations on the dealer's part. If the water softeners are damaged while in the hands of a dealer, Sea-Soft agrees to accept the return of the damaged softeners with no obligation to the dealer. Past experience indicates that 75% of all softeners distributed on this basis are sold by the dealer. In June, 100 units are delivered to dealers at an average billed price of $800 each. The average cost of the softeners to sea-Soft is $600. Based on the expected sales, Sea-Soft reports profit of $15,000. Evaluate Sea-Soft's revenue recognition policy for its compliance with GAAP. What recommendations would you make?

Sea-Soft’s revenue recognition policy is not in compliance with GAAP. Based on the facts described above, Sea-Soft grants its dealers rights of return if they are unable to sell the water softeners within 90 days or the products are damaged. Because the return of merchandise can negate benefits of having made a sale, the seller must be able to make reliable estimate of future returns, and the right of return should be specified contractually as expiring on some future date.

According to SAB No. 101, revenue is recognized when “persuasive evidence of a sales arrangement exists; delivery of goods occurs through transfer of title and risk and rewards of ownership, the selling price is fixed or determinable and collectability is reasonably assured…” In this case, even thought a 25% of return within 90-day period can be estimated by Sea-Soft, there is still a high degree of uncertainty that the water softeners might be returned at a…...

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