Question

Please solve the question with the journal entries

Question (3-B) Kappa prepares financial statements to 30 September each year. During the year ended 30 September 2015, Kappa entered into the following transactions: (11) On 20 September 2015, Kappa sold 100 identical items to a customer for $2,000 each. The items cost Kappa $1,600 each to manufacture. The terms of sale are that the customer has the right to return the goods for a full refund within three months. Afterthe three-month period has expired the customer can no longer return the goods and payment becomes immediately due. Kappa has entered into transactions of this type with this customer previously and can reliably estimate that 4% of the products are likely to be returned within the three month period. Required: Explain and show how both these transactions would be reported in the financial statements of Kappa for the year ended 30 September 2015 (5 marks)

Answer 1

In the given question, a customer is given the right to return the goods within three months and is given full refund . On an average basis 4% of the goods are returned back during that period. That means, if units of goods sold are 100, 4 units are returned back resulting in a net sale of 96 units.

Since the goods are sold on credit;

Accounts Receivable = $2000 × 100 = $ 200000

Total Revenue = $2000 × 96 = $ 192000

Balance = $200000 - $192000 = $ 8000

This amount of $8000 will be recognised as a refund liability and will be reported in the financial statements under current liabilities.

While considering the cost of goods sold;

Total COGS = $1600 × 100 = $ 160000

Cost of sales = $ 1600 × 96 = $ 153600

Balance = $160000 - $153600 = $ 6400

This amount of $6400 will be recognised as a right of return assets and will be reported in the financial statements under current assets.

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