A publishing company delivers 130,000 copies of a new textbook to bookstores during the year. The bookstores pay the publisher $10 per book, but have the right to be reimbursed for any books returned within one year. The cost of the books to the publisher is $5 per book. What are the financial statement effects of this transaction if (a) revenue is recognized at sale, and (b) revenue is recognized when return rights expire? What forecasts, if any, do you have to make to complete the recording of this transaction? What factors would determine which of these two approaches is appropriate? As a financial analyst, what questions would you raise with the firm’s CFO?



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