McLaughlin Novelty Corporation developed an unusual product, electric clip- on eyeglass wipers. McLaughlin felt the product would appeal to hikers, joggers, and cyclists who engaged in their sports in rainy climates. Because retail establishments were skeptical about the market appeal of the product, McLaughlin sold the product with a declining unconditional right of return for up to 10 months, with 10% of the right- of- return amount of the purchase expiring each month for 10 months. Thus, after the retailer had the product for one month, only 90% could be returned. After two months, only 80% could be returned, and after 10 months, the right of return was fully expired. McLaughlin had no basis for estimating the amount of returns. Consistent with the terms McLaughlin offered its customers, all retailers paid cash when purchasing the clip- on eye-glass wipers but received cash refunds if goods were returned. McLaughlin had its first sales of the product in September 20X5. Sales for the remainder of the year and returns prior to 31 December 20X5, were as follows:

Each unit of product costs McLaughlin $ 6 to produce.

Required: 

1. Show the journal entries to record the four months of sales transactions, including the deferral of gross margin. Prepare one summary entry. 

2. Show a summary entry to record the returns in 20X5. 

3. Compute the amount that McLaughlin can record as (realized) sales for 20X5. How much is the gross margin? Record the revenue recognition entry. 

4. For the above transactions, total returns in all of 20X6 were as follows:

Month of Sale         Units Returned
September .........             1,000
October .............              2,000
November .........              2,500
December ...........            4,000

Show the entries to record the returns in 20X6 and to record sales revenue and cost of sales from the 20X5 shipments of thisproduct.

Transcribed Image Text:

Month of Sale Units Sold Sales Price Monthly Sales Units Returned September October November December Totals 10,000 12,000 15,000 11,000 48,000 $10 10 12 12 $100,000 120,000 180,000 132.000 2,500 1,000 1,000 $5320004,500