Question

Fact pattern: on november 1, year 1, iba co. entered into a contract with a customer to sell 150 machines for $75 each. the customer obtains control of the machines at contract inception. iba’s cost of each machine is $45. iba allows the customer to return any unused machine within 1 year from the sale date and receive a full refund. iba uses the expected value method to estimate the variable consideration. based on iba’s experience and other relevant factors, it reasonably estimates that a total of 20 machines (12 machines in year 1 and 8 machines in year 2) will be returned. iba estimates that (1) the machines are expected to be returned in salable condition and (2) the costs of recovering the machines will be immaterial. during year 1, 10 machines were returned. at the end of year 1, iba continues to estimate that a total of 20 machines will be returned within 1 year from the sale date. what amount of refund liability, if any, will be reported in iba’s december 31, year 1, balance sheet?

Answer 1

$750

Step-by-step explanation:

Since Iba's estimate of returned products is 20 units for both year 1 and 2, and only 10 units have been returned by the end of year 1, they must record a refund liability = 10 units x selling price = 10 units x $75 per unit = $750

Refund liability should represent the total amount that Iba considers that its clients are entitled to receive.