Question

Music Company started business in March 2018. Sales for its first year were $490,000. Beethoven ed its merchandise to yield a 45% gross profit based on sales dollars. Industry statistics suggest that 10% of the merchandise sold to customers will be returned. Beethoven estimated its sales returns based on the industry average. During the year, customers returned $34,500 in sales. Beethoven uses a perpetual inventory system. Required: 1. Prepare the journal entry to record the sale. 2. Prepare the journal entry to record sales returns. 3. Prepare the journal entry to record the year-end adjusting entry for estimated sales returns. Assume that cash has not yet been collected for merchandise that could yet be returned. No Transaction General Journal Debit Credit No Transaction General Journal Debit Credit General Joumal Debit Credit No Transaction

Answer 1

No.	Particulars	Dr/Cr	Amount	Amount
1	Debtors A/c	Dr	$        490,000
	Sales A/c	Cr		$        490,000
	(Being credit sales recorded)
2	Cost of Goods Sold A/c	Dr	$        269,500
	Inventory A/c	Cr		$        269,500
	(Being Cost of Sales recorded for Sales above)
	If GP is 45% then COS is 55% --> 490,000*55%
3	Sales Returns A/c	Dr	$          34,500
	Debtors A/c	Cr		$          34,500
	(Being Sales Returns recorded)
4	Inventory A/c	Dr	$          18,975
	Cost of Goods Sold A/c	Cr		$          18,975
	(Being Inventory reinstated for goods returned)
	Valued at 55% of the sales return amount
5	Sales Return Expense A/c	Dr	$          14,500
	Provision for Sales Return A/c	Cr		$          14,500
	(Being provision for sales return recorded)
6	Expected returns from customers A/c or Provision for Sales Return A/c	Dr	$            7,975
	Sales Return Expense A/c	Cr		$            7,975
	(Being cost portion of sales return provision recognised as asset/decrease in provision)
	Calculation of provision
	Total Sales		$        490,000
	Estimation of 10% return (A)		$          49,000
	Actual sales return for the year (B)		$          34,500
	Net provision required for the year (A)-(B)		$          14,500
	Cost of inventory @ 55% for provision made		$            7,975
	Note: The Companies along with recognising the provision for sales return should also recognise the portion of inventory that will be returned in the process. The Companies have options to either recognise this as a separate asset under Other Assets with the heading expected returns from customers or can net it off against the provision for sales recognised. In nutshell, the expense hit on the Profit and Loss of the Company should only be for the Gross Profit which is 45% in this case. In your classes and in practical scenarios, the preference would be given to netting it off from the provision for sales made on sales amount rather than recognising it as a separate asset. Hope this clarifies!