Reference no: EM132748890

Question - The following are selected transactions and events of Choi Fung Limited (Choi Fung) during the year ended 30 June 2020.

One of the businesses of Choi Fung is to sell the notebook computers (computers) with a return policy in a given period.

Assume that on 16 April 2020, Choi Fung signed a contract and sold 100 computers for $20,000 each on account to XYZ Limited. Choi Fung allowed XYZ Limited to return any unused computers within 45 days of purchase. The cost of each product was $12,000.

Choi Fung estimated that:

i. Five computers would be returned.

ii. The cost of recovering the products would be immaterial.

iii. The returned products were expected to be resold at a profit.

On 24 April 2020, XYZ Limited returned three computers. On 30 April 2020, Choi Fung prepared financial statements for month end reporting and determined that it was likely that only two more computers would be returned. Hence, Choi Fung was still with the assumption that the most likely outcome was five computers in total would be returned at the end.

Required:

(a) Prepare the accounting treatment (with journal entries) for the sale of the computers and the related cost of goods sold on 16 April 2020 and the return of the computers on 24 April 2020.

(b) On 30 April 2020, if Choi Fung believed the original estimate of the total return was still correct; explain how to account for expected returns at 30 April 2020 with appropriate accounting treatment.

(c) On 31 May 2020, prepare the journal entries for the following situation if:

(i) 7 more computers were returned.

(ii) 2 more computers were returned.

(iii) No more computers were returned.