Mcgraw Hill Connect: Intermediate Accounting Research Case 5-11

Intermediate Accounting I

Research Case 5-11

2. According to Financial Accounting Standards No. 48, there are four factors that may impair the ability to make a reasonable estimate of returns. These four factors include:

a. “The susceptibility of the product to significant external factors, such as technological obsolescence or changes in demand

b. Relatively long periods in which a particular product may be returned

c. Absence of historical experience with similar types of sales of similar products, or inability to apply such experience because of changing circumstances, for example, changes in the selling enterprise's marketing policies or relationships with its customers

d. Absence of a large volume of relatively homogeneous transactions.” (FAS 48, 8).

3. Criteria that must be met before revenue can be recognized when the right of return exists are the following:

a. “The seller's price to the buyer is substantially fixed or determinable at the date of sale.

b. The buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product.

c. The buyer's obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product.

d. The buyer acquiring the product for resale has economic substance apart from that provided by the seller.

e. The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer.

f. The amount of future returns can be reasonably estimated.” (FAS 48, 6).

5. The revenue recognition policies for both Hewlett-Packard (HP) and Advanced Mirco Systems Inc meet the basic criteria laid out by FASB for revenue recognition when right of return exists. Advanced Mirco Systems is a partner of HP and much smaller than HP. The nature of HP’s business differs from that of Advanced Micro Systems and therefore their revenue recognition is...