FASB Cases: Sales Returns, Drummond Company, Lion Company

Solution Preview

Mini-Case # 1
Sales Returns

Sales for which a right of return exist may only be recognized at the time of sale if certain conditions are met: price is fixed, payment is not contingent on resale, obligation to seller is not changed if the product is destroyed or lost, buyer has economic substance for the purchase and amount of returns can be reasonably estimated (FASB Codification 601-15-25-1). Further, when return policies are first enacted, as in this case, recognition must occur when the right of return expires as there is no history to use in reserving for sales returns. So, increasing the sales period may increase sales transactions but it will also increase the offsetting reserve for sales returns, leading to little difference in net sales.

Mini-Case # 2
Impairment of fixed assets

Long-lived assets should be tested for "recoverability" whenever events indicate that the carrying value may not be recoverable. The Birmingham losses are such a triggering event (FASB Codification 360-10-35-21). Next, you would compare the undiscounted cash flows generated from these assets and see if the carrying value is above this amount (recoverability test). If Birmingham fails the recoverability test, then you would write the assets down to their fair value and record an impairment loss (FASB Codification 360-10-35-17).

Mini-Case # 3
Goodwill

Goodwill used to be amortized but that treatment changes many years ago. Current accounting standards require that goodwill be tested for impairment (FASB Codification 350-20-35-1).

References:
From FASB Codification www.fasb.org

Your summary is 214 words and gives the FASB codification citation for the remarks. The FASB literature is also cut and pasted into the response for the student's inspection as the signon is a temporary one.

FASB CODIFICATION QUOTES:

Sales of Product when Right of Return Exists
605-15-25-1 If an entity sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at time of sale only if all of the following conditions are met:
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. If the buyer does not pay at time of sale and the buyer's obligation to pay is contractually or implicitly excused until the buyer resells the product, then this condition is not met.
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. This condition relates primarily to buyers that exist on paper, that is, buyers that have little or no physical facilities or employees. It prevents entities from recognizing sales revenue on transactions with parties that the sellers have established primarily for the purpose of recognizing such sales revenue.
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 (see paragraphs 605-15-25-3 through 25-4). Because detailed record keeping for returns for each product line might be costly in some cases, this Subtopic permits reasonable aggregations and approximations of product returns. As explained in paragraph 605-15-15-2, exchanges by ultimate customers of one item for another of the same kind, quality, and price (for example, one color or size for another) are not considered returns for purposes of this Subtopic.
Sales revenue and cost of sales that are not recognized at time of sale because the foregoing conditions are not met shall be recognized either when the return privilege has substantially expired or if those conditions subsequently are met, whichever occurs first.
605-15-25-2 If sales revenue is recognized because the conditions of the preceding paragraph are met, any costs or losses that may be expected in connection with any returns shall be accrued in accordance with Subtopic 450-20.
605-15-25-3 The ability to make a reasonable estimate of the amount of future returns depends on many factors and circumstances that will vary from one case to the next. However, any of the ...