Physical Goods to be included in the Inventory ✗

The basic criterion for including items in inventory is economic control rather than physical possession. Economic
control is usually consistent with possession of legal title
1. Goods in transit – the terms of shipment determine whether the buyer or seller has title to the goods.
a. If the goods are shipped FOB shipping point, title passes to the buyer when the seller delivers the
goods to the common carrier. The buyer includes those goods in its inventory and the seller
excludes them.
b. If the goods are shipped FOB destination, title does not pass until the buyer receives the goods from
Consignor the common carrier. The seller still includes those goods in its inventory and buyer excludes them
↳ principal
2. Consigned goods – the company delivering the goods, the consignor, retains control and ownership, while the
> out
company receiving the goods, the consignee, attempts to sell them.
0
a. Goods out on consignment – consignor still retains ownership and the goods are included in its
inventory at cost plus the handling and shipping costs incurred in the delivery to the consignee.
Consignee b. Goods 0 held on consignment – the consignee, acting as an agent of the consignor, excludes the
↳ agent goods from its inventory Freight out consignment ✓ inventory
held
3. Installment sales – despite retention of title by the seller, the substance of the transaction is that control over
the goods has passed to the buyer, assuming a reasonable expectation of payment in the normal course of
business. The goods are recorded as sold when delivered and are excluded from the inventory of the seller.

4. Sales on approval - goods sent on approval to a potential buyer should remain as inventory on the seller
until payment is received for items kept by the buyer.

5. Special sales contract

5.1 Product-financing (Sale with a buyback agreement) – also known as a park sale because the seller parks
(transfers) its inventory in the buyer’s premises thru sales contract that clearly specifies to purchase back the
same inventory over a specified period of time at a specified amount. Include as inventory of the seller
5.2 Sale but buyer given the right to return –
Sale but buyer given the right to return – To account for sales with rights of return, (and for some
services that are provided subject to a refund), companies generally recognize all of the following.
• Revenue for the transferred products in the amount of consideration to which seller is reasonably
assured to be entitled considering the products expected to be returned or allowances granted.
• An asset (and corresponding adjustment to cost of goods sold) for its right to recover inventory
from the customer. If the company is unable to reliably estimate the level of returns, it should not
report revenue until the returns are predictable.
Date of sale
Cash X
Sales X
Refund liability X
Output VAT X
A refund liability is recognized if the entity receives consideration from a customer and expects to refund
some or all of that consideration to the customer.

Cost of sales X
Asset (right to recover products) X
Inventory X
X

As products are returned

Refund liability X
Output VAT (sales returns) X
Cash X

Inventory X
Asset (right to recover products) X

As right to return expires

Refund liability X
Sales X

Cost of sales X
Asset (right to recover products) X
 6. Segregated goods - mere segregation does not exclude such inventory, however, if the segregation is due
toe-
sales contract such as special order, such inventory is excluded in the inventory of the seller.

Use the following information for the next four (4) questions:

During December of the current year, an entity sold 50,000 units at P150 per unit. The cost for each unit is P100.
The entity granted the customers a right to return within 60 days if not satisfied and will receive either a full refund
if cash was already paid or a full credit for the amount owed to the entity.

It is estimated that 4% of the units sold will be returned within the 60-day period. The entity used the perpetual
method.

1. What amount of sales revenue should be reported for the month of December?
A. P7,500,000 B. P7,200,000 C. P5,000,000 D. 0

2. What amount should be recognized as refund liability at year-end?

A. P300,000 B. P200,000 C. P100,000 D. 0

3. What amount should be reported as cost of goods sold December?

A. P5,000,000 B. P4,800,000 C. P4,700,000 D. P5,200,000

4. What is included in the journal entry to record the sales for December?
A. Credit sales P7,200,000
B. Credit refund liability P300,000
C. Debit cost of goods sold P4,800,000
D. All of these are included in the journal entry

Accounts receivable (50,000 x 150) 7,500,000

Sales 7,200,000
Liability (4%) 300,000

Cost of goods sold 4,800,000

Asset right of return (4%) 200,000
Inventory (50,000 x 100) 5,000,000

SALES RETURNS AND ALLOWANCES

To account for sales with rights of return, (and for some services that are provided subject to a refund), companies
generally recognize all of the following.
a. Revenue for the transferred products in the amount of consideration to which seller is reasonably assured to
be entitled considering the products expected to be returned or allowances granted.

b. An asset (and corresponding adjustment to cost of goods sold) for its right to recover inventory from the
customer.
If the company is unable to reliably estimate the level of returns, it should not report revenue until the returns
are predictable.

Date of sale
Cash X
Sales X
Refund liability X
Output VAT X
A refund liability is recognized if the entity receives consideration from a customer and expects to refund
some or all of that consideration to the customer.

Cost of sales X
Asset (right to recover products) X
Inventory X
X
 As products are returned
Refund liability X
Output VAT (sales returns) X
Cash X

Inventory X
Asset (right to recover products) X

As right to return expires

Refund liability X
Sales X

Cost of sales X
Asset (right to recover products) X

Example
Invoice / OR
Goods 1,000,000
VAT 120,000
Total 1,120,000

Assumed 20% are estimated to be returned

PFRS 15
Financial statements Reconciliation Tax Returns
Sales 800,000 Sales 1,000,000
VAT 120,000 VAT 120,000
Deferred tax consideration

Note: (Right of return)

No Cash Refund With Cash Refund (Sales on account)
Net Method Dr. Accounts receivable (Gross)
Dr. Accounts receivable (Net) Cr. Sales (Net)
Cr. Sales (Net) Cr. Refund liability

Allowance Method With Cash Refund (Cash Sales)

Dr. Accounts receivable (Gross) Dr. Cash (Gross)
Cr. Sales (Net) Cr. Sales (Net)
Cr. Allowance for sales returns and allowances Cr. Refund liability