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Q20E

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Financial & Managerial Accounting
Found in: Page 212
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

Chico Company allows its customers to return merchandise within 30 days of purchase.

  • At December 31, 2017, the end of its first year of operations, Chico estimates future-period merchandise returns of $60,000 (cost of $22,500) related to its 2017 sales.
  • On January 3, 2018, a customer returns merchandise with a selling price of $2,000 for a cash refund; the returned merchandise cost $750 and is returned to inventory as it is not defective.

a. Prepare the December 31, 2017, year-end adjusting journal entry for estimated future sales returns and allowances (revenue side).

b. Prepare the December 31, 2017, year-end adjusting journal entry for estimated future inventory returns and allowances (cost side).

c. Prepare January 3, 2018, journal entry(ies) to record the merchandise returned.

  1. In this journal entry, allowance for sales return is debited, and sales refund payable is credited.
  2. In this journal, the allowance for inventory return is increased through debit, and the cost of goods sold is reduced through credit.
  3. Two journal entries will be made for actual returns made by the customer. One is for cash paid in respect of return, and the other is for reducing the cost of goods sold and increasing the merchandise inventory.
See the step by step solution

Step by Step Solution

Step-by-Step SolutionStep 1: Definition of Sales Discount

The factor that reduces the selling price of a product is known as a sales discount. It reduces the selling price and revenue of the business entity and therefore, it is considered a contra-revenue account.

Step 2: Adjusting journal entry for future sales returns

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2017

Sales return and allowance

$60,000

Sales refund payable

$60,000

Step 3: Adjusting journal entry for future inventory returns

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2017

Inventory return estimated

$22,500

Cost of goods sold

$22,500

Step 4: Journal entries to record merchandise returned

Date

Accounts and Explanation

Debit $

Credit $

3 Jan 2018

Sales return and allowances

2,000

Cash

2,000

3 Jan 2018

Merchandise inventory

750

Cost of goods sold

750

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