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ACCA Strategic Professional · Strategic Business Reporting (International) · Revenue

Group entity Sable Co, a subsidiary of Pavo plc, sold goods to a customer for $800,000 with a right of return within 60 days. Sable estimates that 10% of goods (selling price) will be returned, with a cost of $480,000 for all goods sold, and returned goods can be resold at no loss. At the reporting date, no returns have occurred. What entries does Sable make, ignoring tax and assuming cash received?

Sable recognises revenue of $720,000 and a refund liability of $80,000 for expected returns. It also recognises cost of sales of $432,000 and a right-to-recover asset of $48,000 for goods expected back. This reflects IFRS 15 treatment of rights of return as variable consideration.

  1. ARevenue $800,000; cost of sales $480,000; no refund liability
  2. BRevenue $720,000; refund liability $80,000; cost of sales $432,000; right-to-recover asset $48,000Correct
  3. CRevenue $720,000; refund liability $80,000; cost of sales $480,000; no asset
  4. DRevenue $800,000; provision for returns $80,000 as an expense

Explanation

Expected returns are excluded from revenue: 800,000 x 90% = 720,000, with an $80,000 refund liability. Cost of sales is reduced for goods expected back: 480,000 x 90% = 432,000, with a right-to-recover asset of 48,000. Option C omits the asset, overstating cost of sales.

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