Section 2 Background

MU just developed new universal titanium replacement mixer blades. These replacement blades can be used in most mixers currently on the market. MU is selling these blades with a right of return for 30 days. On January 15, management believes it is probable that 10% of the titanium blades sold will be returned. This belief is based on significant experience in estimating returns on other mixer blades MU has developed and sold in the past. MU estimates the cost of processing any returned blades will be insignificant. On January 15,KH purchases and pays for 40 blades at a cost of $20 each. The cost to manufacture each blade was $14. On January 31, MU's assessment of potential returns had not changed from its assessment on January 15.

Section 2: Part 1 Requirement

You are asked to advise MU on how revenue related to the KH purchase of the titanium blades should be recognized during January. Suggest journal entries and disclosures, if required. Your memo should be based on current GAAP.