Fundamental Accounting Principles
Fundamental Accounting Principles
23rd Edition
ISBN: 9781259536359
Author: John J Wild, Ken Shaw Accounting Professor, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
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Chapter 5, Problem 21E
To determine

Concept Introduction:

Estimated Future returns: These are the estimates made by the company with the consideration that the customers may return the sold product in the future if they are not satisfied with the product.

  1. The Gross Profit using the unadjusted figures.

Expert Solution
Check Mark

Answer to Problem 21E

Solution:

Gross Profit=Sales- Cost of sales=$100,000-$30,000=$70,000

  1. It is given that the company expects future returns and allowances equal to 5% of sales and 5% of cost of sales.

Explanation of Solution

  1. Adjusting entry to record the sales expected to be returned-
Particulars Debit ($) Credit ($)
Returns and allowances account 5,000  
To Accounts receivable account   5,000

Working:

Return and allowances on sales=Sales amount×percentage of returns=$100,000×5÷100=$5,000

  1. The adjusting entry to record the cost side of sales returns and allowance-
Date Particulars Debit ($) Credit ($)
Jun 30 Inventory account 1,500  
  To Cost of sales account   1,500

Working:

Return and allowances on cost ofsales=Cost of sales amount×percentage of returns=$30,000×5÷100=$1,500Net sales=Sales-Estimated future returns and allowances=$100,000-$5,000=$95,000Net cost of sales=Cost of sales- Estimated future returns and allowances=$30,000-$1,500=$28,500

  1. The Gross Profit using the adjusted figures-

Net sales=Sales-Estimated future returns and allowances=$100,000-$5,000=$95,000Net cost of sales=Cost of sales- Estimated future returns and allowances=$30,000-$1,500=$28,500

Revised Gross Profit=Sales- Cost of sales=$95,000-$28,500=$66,500

To determine

  1. To Identify: Is sales refund payable shows an asset, liability or equity account?

Expert Solution
Check Mark

Explanation of Solution

Sales refund payable shows a liability account which indicates the amount to be paid to the customers against sales returned made.

To determine

  1. To Identify: Is inventory returns shows an asset, liability or equity account?

Expert Solution
Check Mark

Explanation of Solution

Solution:

Return of inventory increases the assets side by the returned amount of inventory and, hence shows an asset account.

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Chapter 5 Solutions

Fundamental Accounting Principles

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