Junk Grrlz (Junk) is a wholesale distributor of goods. Junk purchases goods that are not selling from manufacturers and other wholesalers and sells them to discount retail outlets. You are a professional accountant and are preparing Junk’s financial statements for the year ended September 30, 2024. The company had $300,000 of real animal fur coats in merchandise inventory that were not selling. Junk has not had an order for real fur coats for over a year. The president is reluctant to write off the inventory and consequently signed a sales agreement with Cheap But Good (Cheap). Cheap agreed to buy the coats for $350,000 and could return any coats that it had not sold by December 31, 2024. In addition, Cheap was not required to pay Junk for the coats until December 31, 2024. The coats were shipped to and received by Cheap on September 29, 2024. 

Instructions 

Write a memo to the president of Junk Grrlz answering the following questions: 

a. Assuming returns cannot be estimated and Junk uses the earnings approach, when should revenue be recognized on the fur coats sold to Cheap? Explain. 

b. How should the fur coats be reported in Junk’s financial statements for the year ended September 30, 2024? Explain