How do I account for sales with a right of return under ASC 606?

Question

AcadiFi · Accepted Answer

When customers have a right of return, the seller should not recognize revenue for products expected to be returned. Instead, record: (1) revenue for the amount the entity expects to be entitled to (excluding estimated returns), (2) a refund liability for the estimated returns, and (3) an asset for the right to recover products. Example: Marchetti Apparel sells 8,000 jackets at $180 each, or $1,440,000 gross. Based on historical data, it expects a 6% return rate. Revenue recognized = $1,440,000 x 94% = $1,353,600. A refund liability of $86,400 is booked. COGS is reduced by the cost of expected returned inventory (say cost is $72 per jacket, so $86,400 x 40% = $34,560 asset for recovery right). At quarter-end, actual returns totaled 510 jackets ($91,800) — Marchetti adjusts the liability with a $5,400 charge to revenue. Note: the estimate must use the 'expected value' or 'most likely amount' method, and is subject to the variable consideration constraint — if Marchetti cannot reliably estimate returns (new product line, no history), it defers all revenue until the return window closes.

How do I account for sales with a right of return under ASC 606?

Master Level II with our CFA Course

Related Questions

Practice Questions