Canadian Coat Company sells outdoor apparel to retailers all over Canada. The owner, Leo Wallace, is trying to decide whether to use the contract-based or earnings approach for revenue recognition. The company is not publicly traded now but the owner is considering it in the near future. Mr. Wallace indicated that the company?s return policy is 20 days from the date of sale and based on previous transactions, he estimated that returns are 10% of sales on average. The company currently uses a perpetual inventory system and does not off er a cash discount to customers at this time. He has asked you to review the following transactions for the month of June and prepare a comparison of the journal entries required using each approach.

June 5 Sold 500 winter coats that cost $150 to L??toile Fashions for $200 each, terms, n/15.

8 Sold 250 winter coats that cost $125 to Super Warehouse for $190 each, terms, n/15.

10 L??toile returned 25 winter coats because they were the wrong colour and it received a credit to its account. The coats were returned to inventory.

16 Sold $8,000 of coats, gloves, and boots to ShopCo, terms n/15. The goods cost Canadian Coat Company $6,000.

18 Received the amount owing from L??toile.

20 Received the amount owing from Super Warehouse.

24 ShopCo returned $500 of the goods purchased on June 16 because they were damaged.

Canadian Coat Company could not resell these goods and donated them to a local charity for use or recycling. The goods cost Canadian Coat Company $375.

Instructions

a. Using a table similar to the one below, prepare journal entries for the above transactions using the contract-based and earnings approaches to revenue recognition. The first journal entry has been partially completed.

b. Prepare a brief memo to Mr. Wallace that describes the main differences between the two approaches and discuss the purpose of recording estimated returns at the time of sale.

Assume Canadian Coat Company becomes a publicly traded company in two years. How can adopting the contract-based approach now be advantageous?

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Earnings Approach Contract-Based Approach Account Titles Accounts Receivable Date Account Titles Debit Credit Debit Credit June 5 Accounts Receivable