Question

The FASB concluded that if a company sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at the time of sale only if all of six conditions have been met. Which of the following is not one of these six conditions?

a. The amount of future returns can be reasonably estimated.
b. The seller's price is substantially fixed or determinable at time of sale.
c. The buyer's obligation to the seller would not be changed in the event of theft or damage of the product.
d. The buyer is obligated to pay the seller upon resale of the product.

Answer 1

The incorrect condition among those provided is 'The buyer is obligated to pay the seller upon resale of the product.' because FASB's criteria for revenue recognition relate to the original sale, not subsequent resales. Revenue recognition at the time of sale with a return right is subject to specific conditions regarding estimation of returns, price determination, payment obligations, and seller's performance obligations.

Step-by-step explanation:

The condition that is not one of the six conditions cited by the Financial Accounting Standards Board (FASB) for the recognition of revenue at the time of sale with a right of return is the following: 'The buyer is obligated to pay the seller upon resale of the product.' This is not one of the conditions because the other conditions relate to the transaction between the seller and the original buyer, not a subsequent sale. The FASB's criteria typically include the ability to estimate returns, the price being fixed or determinable, and other factors that affect how the revenue is recognized, but not obligations regarding future resales.

The six conditions mentioned by the FASB for such sales with a potential return usually include:

1. The seller's price to the buyer is substantially fixed or determinable at the time of sale.
2. 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.
3. The buyer's obligation to the seller would not be changed in the event of the theft or damage of the product.
4. The buyer acquiring the product for resale has economic substance apart from that provided by the seller.
5. The seller does not have significant obligations for future performance to directly bring about the resale of the product by the buyer.
6. The amount of future returns can be reasonably estimated.

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In the context of goods market, offering a money-back guarantee can be an effective way to alleviate customer concerns about product quality, particularly in situations where the product cannot be inspected prior to purchase, such as online sales or mail-order catalogs. Understanding the concept of total revenue is also important, which is calculated as the product of price and quantity sold.