Question

On November 1, Year 1, an entity sold 50 machines to a customer for $100 each. The cost of each machine is $20. The entity allows customers to return any unused machine within 6 months and receive a full refund. The entity uses the expected value method to estimate the variable consideration. Based on the entity’s experience and other relevant factors, it reasonably estimates that 10 machines (6 in Year 1 and 4 in Year 2) will be returned. What amount of revenue is recognized by the entity from the sale of these machines on November 1, Year 1?

Answer 1

Answer: $4400

Explanation:

The following information can be gotten from the question:

Number of machine sold = 50

Cost of each machine = $20

Amount sold per machine to the customer = $100

We are also informed that based on the experience of the entity and other factors, it estimates that 10 machines which are 6 in Year 1 and 4 in Year 2 will be returned.

The amount of revenue is recognized by the entity from the sale of these machines on November 1, Year 1 will be the number of machine sold minus the expected machine to be returned for year 1 which is then multiplied by the unit sales price. This can be mathematically written as:

=(50-6) × $100

= 44 × $100

=$4400

The answer is $4400