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book was reversible only in the event of a subsequent return of
the book by the customer.
In computing Random House’s income each year for financial
statement purposes, petitioner took into account the revenue
attributable to books sold to customers during the year, less the
revenue attributable to books actually returned by customers
during such year. This amount was adjusted by the difference
between the "reserve for returns" (reserve for returns) at the
beginning and at the end of the year; i.e., an increase in the
reserve for returns would be subtracted from sales. The reserve
for returns adjustment represented the revenues attributable to
books sold during a particular year that Random House estimated
would be returned during the subsequent year. These factors
resulted in the figure "net sales" appearing on the financial
statements.
The financial statements also took into account, as an
expense each year, royalties payable on book sales, less books
actually returned by customers, during such year. This amount was
adjusted by the difference between the "royalty reserve" (royalty
reserve) at the beginning and at the end of the year; i.e., an
increase in the royalty reserve would be subtracted from the
amount of the royalty expense. The royalty reserve adjustment
represented the royalties attributable to the books sold during a
particular year that Random House estimated would be returned
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Last modified: May 25, 2011