Washburn has a policy of refunding purchases to dissatisfied customers, even though it is under no obligation to do so. However, it has created a valid expectation with its customers to continue this practice. These refunds can range from 5% of sales to 9% of sales, with any amount in between a reasonable possibility. In 2014, Washburn has $50,000,000 of sales subject to possible refund. The average cost of any refund item is $12.

Discuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale for your answers.