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.
Requirements:
Based on the new guidance on revenue recognition in ASC 606, please provide a detailed explanation whether MP has met all the five steps for revenue recognition. Record all initial accounting entries for MU for the month of January based on the new guidance on revenue recognition in ASC 606. Include references to the guidance to support your proposed accounting. Show any calculations you make to support your journal entries.