At December 31, 2018, EarthWear has $5,890,000 in a liability account labeled "Reserve for returns." The footnotes to the financial statements contain the following policy: "At the time of sale, the company provides a reserve equal to the gross profit on projected merchandise returns, based on prior returns experience." The entity has indicated that returns for sales that are six months old are negligible, and gross profit percentage for the year is 42.5 percent. The entity has also provided the following information on sales for the last six months of the year:

 

MonthMonthly

Sales (000s)Historical Return Rate July$73,3000.004 August 82,8000.006 September 93,5000.010 October 110,2000.015 November 158,2000.025 December 202,5000.032 

 

Required:

a. Using the information given, develop an expectation for the reserve for returns account. Because the rate of return varies based on the time that has passed since the date of sale, do not use an average historical return rate.