Lin Co., a distributor of machinery, bought a machine from
the manufacturer in November year 1 for $10,000. On December
30, year 1, Lin sold this machine to Zee Hardware for
$15,000, under the following terms: 2% discount if paid within
thirty days, 1% discount if paid after thirty days but within sixty
days, or payable in full within ninety days if not paid within the
discount periods. However, Zee had the right to return this machine
to Lin if Zee was unable to resell the machine before expiration
of the ninety-day payment period, in which case Zee’s obligation
to Lin would be canceled. In Lin’s net sales for the year
ended December 31, year 1, how much should be included for
the sale of this machine to Zee?

(a) Revenue from the sale of a product may be recognized
at the time of sale only if all of the following conditions are
met:
1. The seller’s price is fixed or readily determinable.
2. The buyer has paid the seller or is obligated to pay the
seller, the obligation not being contingent on resale of
the product.
3. The buyer’s obligation to the seller remains unchanged
in the event of damage or destruction of the product.
4. The buyer is independent from the seller.
5. The seller does not have any significant obligations regarding
resale of the product by the buyer.
6. The amount of future returns can be reasonably estimated.
Because the buyer, Zee, has the right to return the machine to the
seller, Lin, condition (2) above has not been met. Therefore, the
recognition of sales revenue and cost of sales is not allowable for
this transaction.