Re: Case 03-05, Accounting Issues
Trademark, Inc., a public and growing global corporation, creates, assembles, and disburses their products through four main divisions of their corporation: Greeting Cards and Stationery, Calendars, Party Goods, and Specialty Gifts. Their core business comes from their customers in drug stores and supermarket chains. In the early to mid 1990’s, Trademark saw significant growth in response to their IPO issuance in 1992, however, since 1994, they have seen a flat and ultimate declining growth in their product.
Recently, Trademark, Inc. has realized an overstatement in their return of damage goods and are considering halting their ...view middle of the document...
Also, according to 605-15-25-1-F, it is acceptable that future amounts be reasonable estimated. Secondly, the difference between actual and estimated returns is less than 5%, (FASB ASC 250-10-S99-1) therefore, according to GAAP the difference is immaterial and the accounting procedure is permissible. Lastly, the estimated cost of keeping detailed records for each product line of each division may outweigh the benefits of accurate rates of returns.
Option #2: Trademark, Inc., after responding to complaints and the high rate of returns, relationships with customers increased and they received less returns. Trademark, Inc.’s ability to make a reasonable estimate of future returns was impaired because they altered their shipping method, but did not change how they estimated for the return of damaged goods. According to FASB ASC 605-15-25-3, the ability to make a reasonable estimate of future returns may be impaired if there have been changes in the selling entities policies or relationships with customers. Since Nancy has created a reasonable and acceptable estimate factoring in the impact of new packaging materials, Trademark, Inc. should follow Nancy’s guidance. Furthermore, according to 605-15-45-1, for any sales made with a right of return in which the criteria in paragraph 605-15-25-1 are met revenue and cost of sales reported in the income statement shall be reduced to reflect estimated returns. The difference between management’s estimate and the high end of the range was $923.077, which indicates that Trademark will have to change their income statement by this difference. Therefore, Trademark, Inc. should use the 22% return rate as the new estimate.
In conclusion, Option #2 is the proper solution. Trademark, Inc. should follow the 22% return rate of damaged goods as the estimate.
(2) Other Returns
Trademark, Inc. was previously allowing customers to return slow-moving merchandise for full credit. Customers do not have the legal right of return on merchandise; the returns...