Organic Growth Company is presently testing a number of new agricultural seeds that it has recently harvested. To stimulate interest, it has decided to grant to five of its largest customers the unconditional right of return to these products if not fully satisfied. The right of return extends for 4 months. Organic Growth sells these seeds on account for $1,500,000 on January 2, 2012. Companies are required to pay the full amount due by March 15, 2012.
Instructions
(a) Prepare the journal entry for Organic Growth at January 2, 2012, assuming Organic Growth estimates returns of 20% based on prior experience. (Ignore cost of goods sold.)
(b) Assume that one customer returns the seeds on March 1, 2012, due to unsatisfactory performance. Prepare the journal entry to record this transaction, assuming this customer purchased $100,000 of seeds from Organic Growth.
(c) Briefly describe the accounting for these sales, if Organic Growth is unable to reliably estimate returns.