Check your answer
Write your response and explain your reasoning.
Fictional Northstar Sensors completes a standard sensor on December 28. The customer asks in writing that Northstar hold it because its facility is not ready. Northstar tags the completed sensor to the customer, and delivery can occur at once. Northstar has no use or redirection right. Contract terms make the customer responsible for payment and ownership risks.
An enforceable side agreement gives Northstar a call option to repurchase the sensor for $210,000 after one year. The original selling price is $200,000. This held sensor is separate from the ordinary transferred sales below.
Ordinary product sales of $200,000 have transferred to other customers. Their carrying cost is $120,000. A supported estimate expects 5 percent to be returned. Recovery costs are $500, and expected loss in returned-product value is $300.
The products include one year of legally required defect-only coverage that is not sold separately. Customers can also buy a separately priced two-year plan that provides preventive maintenance beyond defect repair.
Produce a routing tree for the held sensor. Calculate all four return-accounting amounts for the separate ordinary sales. Classify both warranty promises and state one fact that would reverse each branch. End with the calculation boundary.
Use ASC 606-10-25-30, 55-23 through 55-35, and 55-66 through 55-84.
Compare your reasoning with the worked answer
The written request, separate identification, readiness, and lack of seller use or redirection satisfy the additional bill-and-hold conditions. Present payment rights, passed title, and passed risks also support control. However, the enforceable seller call prevents the customer from obtaining control. Because its $210,000 repurchase price exceeds the $200,000 selling price, the supplied terms route the arrangement to financing rather than product-sale accounting. Northstar retains the sensor and records the cash as a financial liability. It must separate interest and any supported holding costs.
The ordinary transferred sales use the supplied 5 percent return estimate. Revenue is $190,000, and the refund liability is $10,000. Gross recovery is $6,000 from the $120,000 carrying cost. After $500 of recovery costs and a $300 value decline, the recovery asset is $5,200. Cost of sales is $114,800, and gross profit is $75,200. Each estimate requires a reporting-date update.
The required one-year defect coverage is assurance under the supplied facts and follows the warranty-liability model. The separately priced preventive maintenance plan is a service performance obligation. It receives an allocation and follows its service transfer pattern.
If the call were unenforceable or lapsed, the bill-and-hold control conclusion would need a fresh review. A seller redirection right would defeat a required bill-and-hold condition. New return evidence would change all linked return balances. Service tasks within the base warranty could change its classification.
The return calculation accepts the transfer, return rate, recovery costs, and value decline as inputs. It cannot establish control, route the repurchase agreement, or classify either warranty.