Question

d

E18-20 (LO3) (Sales with Returns) Organic Growth Company is presently testing a number of new agricultural seeds that it has recently harvested. To stimulate interest, it has decided to grant to five of its largest customers the unconditional right of return to these products if not fully satisfied. The right of return extends for 4 months. Organic Growth estimates returns of 20%. Organic Growth sells these seeds on account for $1,500,000 (cost $750,000) on January 2, 2017. Customers are required to pay the full amount due by March 15, 2017.

Instructions

1. (a) Prepare the journal entry for Organic Growth at January 2, 2017.

2. (b) AssumethatonecustomerreturnstheseedsonMarch1,2017,duetounsatisfactoryperformance.Preparethejournal

   entry to record this transaction, assuming this customer purchased $100,000 of seeds from Organic Growth.

3. (c) Assume Organic Growth prepares financial statements quarterly. Prepare the necessary entries (if any) to adjust Organic Growth’s financial results for the above transactions on March 31, 2017, assuming remaining expected returns of

   $200,000.

Answer 1

ANSWER

Part A

Date	Account titles and explanation	Debit	Credit
Jan. 2, 2017	Accounts Receivable	1500000
	Sales Revenue		1500000
	(To recognize revenue)
	Cost of goods sold	750000
	Inventory		750000
	(to record cost of goods sold)

Part B

Date	Account titles and explanation	Debit	Credit
March 1, 2017	Sales Returns & Allowances	100000
	Accounts Receivable		100000
	(To record sales returns)
	Returned Inventory	50000
	Cost of goods sold		50000
	(to record cost of goods returned)
March 15, 2017	Cash (1500000-100000)	1400000
	Accounts Receivable		1400000

Part C

Date	Account titles and explanation	Debit	Credit
March 1, 2017	Sales Returns & Allowances	200000
	Allowances for Sales Returns & Allowances		200000
	(To record sales returns)
	Estimated Inventory Returns	100000
	Cost of goods sold		100000
	(to record cost of goods returned)

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