Question

A company sends 10,000 units of its products to one of its customers on December 28, Year One. The customer has a right to return any of this merchandise within 6 months for a full refund. The company wants to record this transaction as a sale in Year One. Which of the following is most likely to necessitate that the recording of the transaction as a sale be delayed until Year Two?

The company can make a reasonable estimation that 25 percent of the units will be returned.

Return of the goods is not contingent on resale.

The company cannot make a reasonable estimation of the number of
units that will be returned.

None of the above.

Answer 1

Revenue recognition would likely be delayed until Year Two if the company cannot make a reasonable estimation of the number of units that will be returned, due to the principle of revenue recognition certainty.

Step-by-step explanation:

The recording of the transaction as a sale would most likely be delayed until Year Two if the company cannot make a reasonable estimation of the number of units that will be returned. According to revenue recognition principles, a company can recognize revenue when it is reasonably certain that the revenue will be realized. If there is a high degree of uncertainty regarding product returns and the company cannot estimate this with a sufficient level of precision, it should delay recognition of the sale. Furthermore, recognizing revenue prematurely could lead to inflated sales figures and misrepresent the financial health of the company.