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Q21E

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Financial & Managerial Accounting
Found in: Page 213
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

Lopez Company reports unadjusted first-year merchandise sales of $100,000 and cost of merchandise sales of $30,000.

a. Compute gross profit (using the unadjusted numbers above).

b. The company expects future returns and allowances equal to 5% of sales and 5% of cost of sales.

1. Prepare the year-end adjusting entry to record the sales expected to be refunded.

2. Prepare the year-end adjusting entry to record the cost side of sales returns and allowances.

3. Recompute gross profit (using the adjusted numbers from parts 1 and 2).

c. Is Sales Refund Payable an asset, liability, or equity account?

d. Is Inventory Returns Estimated an asset, liability, or equity account?

  1. Gross profit: $70,000.
  2. Recalculated gross profit after return: $66,500.
  3. Sales refund payable: Current liability.
  4. Inventory return estimated: Current asset.
See the step by step solution

Step by Step Solution

Step-by-Step SolutionStep 1: Definition of Purchase Returns

When goods purchased by a business entity are returned to a supplier due to defects in the products or due to the wrong product, it is reported as purchase returns.

Step 2: Gross profit

Particulars

Amount $

Sales

$100,000

Less: Cost of sales

($30,000)

Gross profit

$70,000

Step 3: Adjusting entries

Date

Accounts and Explanation

Debit $

Credit $

1

Sales return and allowance

5,000

Sales refund liability

5,000

2

Inventory return estimated

1,500

Cost of goods sold

1,500

Re-calculation of gross profit:

Particulars

Amount $

Sales

$100,000

Less: Sales return and allowance

(5,000)

Net sales

95,000

Less: Cost of sales

(28,500)

Gross profit

$66,500

Step 4: Classification of sales refund payable

Sales refund payable is reported as a current liability because it represents the amount to be refunded to a customer for returns. These returns are made within the business entity’s operating period.

Step 5: Classification of Inventory return estimated

Inventory return estimated is used to restore the goods returned to a business’s inventory because they are not defective, and therefore, it is considered a current asset account.

Most popular questions for Business-studies Textbooks

Prepare journal entries to record the following merchandising transactions of Lowe’s, which uses the perpetual inventory system and the gross method. (Hint: It will help to identify each receivable and payable; for example, record the purchase on August 1 in Accounts Payable—Aron.)

Aug. 1 Purchased merchandise from Aron Company for $7,500 under credit terms of 1∕10, n∕30, FOB destination, invoice dated August 1.

5 Sold merchandise to Baird Corp. for $5,200 under credit terms of 2∕10, n∕60, FOB destination, invoice dated August 5. The merchandise had cost $4,000.

8 Purchased merchandise from Waters Corporation for $5,400 under credit terms of 1∕10, n∕45, FOB shipping point, invoice dated August 8.

9 Paid $125 cash for shipping charges related to the August 5 sale to Baird Corp.

10 Baird returned merchandise from the August 5 sale that had cost Lowe’s $400 and was sold for $600. The merchandise was restored to inventory.

12 After negotiations with Waters Corporation concerning problems with the purchases on August 8, Lowe’s received a credit memorandum from Waters granting a price reduction of $400 off the $5,400 of goods purchased.

14 At Aron’s request, Lowe’s paid $200 cash for freight charges on the August 1 purchase, reducing the amount owed to Aron.

15 Received balance due from Baird Corp. for the August 5 sale less the return on August 10.

18 Paid the amount due Waters Corporation for the August 8 purchase less the price allowance from August 12.

19 Sold merchandise to Tux Co. for $4,800 under credit terms of n∕10, FOB shipping point, invoice dated August 19. The merchandise had cost $2,400.

22 Tux requested a price reduction on the August 19 sale because the merchandise did not meet specifications. Lowe’s sent Tux a $500 credit memorandum toward the $4,800 invoice to resolve the issue.

29 Received Tux’s cash payment for the amount due from the August 19 sale less the price allowance from August 22.

30 Paid Aron Company the amount due from the August 1 purchase.

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