Problem 2 (20 points): The following facts pertain to the year ended December 31, 2008 of Sellmore Company, a manufacturer of power tools:

• Based on year-to-date sales through early December, management projected 2008 sales to be 5% lower than their bonus target.

• Effective December 15, 2008, the company started to offer the following incentives to boost sales: (a) normal 2/10, n/30 payment terms were extended to n/90 and (b) full right of return was extended from 30 days to 90 days during the last two weeks of December.

• The company has never before been forced to offer such incentives and thus has no basis for estimating return rates on these sales.

• The marketing department aggressively promoted the incentive program by stressing the "no-risk" nature ("if you can't sell them, just return them to us"). The program generated sales for December 15 to 31, 2008 of $350,000. Management included all of this revenue to make the bonus target. The company charged $200,000 to costs of goods sold.

• The effective and marginal tax rate is 35%

Prepare adjusting entries to correct the impact of this incentive program for both 2008 and 2009. Assume that 30% of the sales from December 15 to 31, 2008 were returned to the company during 2009. [Hint: revenue recognition rules promulgated by SFAS 48 dictate that Sellmore's sales under the above incentive program should be deferred until the 90-day return period expires].