Washburn has a policy of refunding purchases to dissatisfied customers, even tho
ID: 2418470 • Letter: W
Question
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.
Explanation / Answer
The amount refundable to customers in case of dissatisfaction, is to be considered as a Contingent Liability. Although the % of refunds averages 5% to 9% of sales, with a value of $ 12 per item refunded, since the exact quantum thereof is not known, the liability cannot be accurately ascertained.
Hence, the following note should appear in the Notes to Financial Statements of Washburn :
Washburn has a policy of refunding purchases to dissatisfied customers, even though it is under no obligation to do so. The normal average percentage of refunds ranges between 5% to 9% of sales made, which are subject to such refunds. In the year 2014, Washburn made sales totaling $ 50,000,000, which are eligible for such refunds. The minimum amount refundable to dissatisfied customers is $ 250,000 while the maximum amount refundable to such customers will be $ 450,000 (based on the range percentages given). However, in the absence of information as to the actual number of items given at a cost of $12 per item, the liability cannot be ascertained immediately. Based on an assessment of the claims received and those which are considered valid and settled, this liability will be worked out and paid, in the next financial year. Hence, the amount of profits for 2015 are likely to be reduced by a minimum amount of $ 250,000 to a maximum amount of $ 450,000, depending on the number of claims settled by Washburn.
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