Question
Tapestry uses a fiscal year of June 30, so the quarterly reportswill be for September 30, December 31, March 31. Let's say that the contractually
- Tapestry uses a fiscal year of June 30, so the quarterly reportswill be for September 30, December 31, March
31. Let's say that the "contractually guaranteed minimum royaltyamount" from Fossil to Tapestry is $10,000 yearly, and the royalties are transferred from Fossil to Tapestry quickly as sales are made. Let's say that each quarter Fossil pays either the 1 percent of sales or the quarterly ratable guaranteed minimum, whichever is less. Fossil's sales of Kate Spade watches had this pattern for the year.
Quarterlysales | |||||
September 30 | December 31 | March 31 | June 30 | Total for year | |
Sales | $100,000 | $150,000 | $400,000 | $500,000 | $1,150,000 |
- Provide the journalentry for Tapestryto record the license revenue from Fossil for the quarterending September 30.
- Provide the journalentry for Tapestryto record the license revenuefrom Fossil for thequarter ending December 31.
- Provide the journalentry for Tapestryto record the license revenuefrom Fossil for thequarter ending March 31.
- Provide the journalentry for Tapestry to record the license revenuefrom Fossil for thequarter ending June 30.
- I can imagine that a Fossil customer will occasionally return a watch. This suggests that a royalty paid from Fossil to Tapestry is either returnedor maybe the next payment is slightly deductedfor the returns.What this means for Tapestry is that Tapestry should understand that the revenue recognized from "Required 1." is not likely to be the actual final net revenue. The final net revenue will be somewhat lower because of returns. Tapestry is required to estimate how much the returns will be. Let's say that Tapestry's share of anticipated returns will be $500. Tapestry will make a journal entry like this:
Sales Returns $500
Estimated Returns $500
The account, Sales Returns,will be deducted from Sales to reportNet Sales.
In your text, Figure6-1 describes GAAP accounting rules and management discretion. Suppose management is close to getting a bonus this year, based on sales growth. Will management have an incentive to increase the estimate of sales returns or decrease the estimate? Explain.
- Suppose management intendsto exercise their discretion. Within the financial reporting process,what are the likely responsibilities of the
- Audit Committee
Compensation Committee.
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