Tango Treasures Company sells home furnishings. On February 1, Tango Treasures entered into a contract with Simon Development Ltd. for home furnishings with a selling price of $40,000 and terms of n/30. The goods cost Tango $28,000. Tango Treasures has a stated return policy of 20 days from the date of sale and based on past transactions, management determines that returns are 5% of sales 65% of the time and 10% of sales 35% of the time. The goods were delivered to Simon Development on February 15. Tango Treasures uses the expected value method to estimate returns and the contract-based approach for revenue recognition.

Instructions

a. Identify the variable consideration in the contract between Tango Treasures and Simon Development Ltd.

b. Calculate the transaction price for this contract.

c. Prepare the journal entries to recognize revenue on the appropriate date. The expected value method is also used to determine the amount for cost of goods sold and estimated inventory returns.