Revenue Recognition and Sales Return Issues at Medicis Corporation

Abstract

ABSTRACT Sales returns are often considered a simple financial accounting topic, but in this case, accounting for sales returns led to a significant lawsuit and the largest fine ever imposed against a CPA firm by the PCAOB at the time. This case study is designed to aid instructors in teaching accounting for sales with right of return under ASC 606 and is suited for an intermediate financial accounting course or a graduate course in accounting research. Students are required to exercise higher-order skills, such as professional research and analysis, as they research and understand the following: (1) the FASB's prior revenue recognition guidance when a right of return exists (ASC 605) and the FASB's new revenue recognition guidance ASC 606; (2) the financial statement impact of alternative methods of accounting for sales returns; and (3) how to account for unique return policies, such as a return for expiration.