Choice "A" is correct. Fleet earns royalties based on 10% of net sales, so the first step is the calculation of net sales:
| | |
|---|
| Sales | $ 600,000 | |
| Allowance for sales returns | 6,000 | $ $600,000 x 1% |
| Net Sales | $ 594,000 | |
Net sales can then be used to calculate Fleet's royalty income: Net Sales x Royalty %$594,000 x 10%$59,400Choice "d" is incorrect. Sales returns are not subtracted from 10% of gross sales to calculate Fleet's royalty income.
Choice "b" is incorrect. Fleet's royalty revenue should be calculated using net sales, rather than gross sales.
Choice "c" is incorrect. Royalty revenue is not equal the advance against future royalty earnings received by Fleet. Fleet's royalty revenue is equal to 10% of the net sales for the period. The advance against future royalty earnings should have been recorded as unearned revenue when received. At the end of 2002, $15,600 ($75,000 advance - $59,400 royalty income earned) of the advance would remain in unearned revenue.
