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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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BuyFindarrow_forward

Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Customer returns and allowances

Zell Company had sales of $1,800,000 and related cost of merchandise sold of $1,150,000 for its first year of operations ending December 31, 2016. Zell Company provides customers a refund for any returned or damaged merchandise. At the end of the year, Zell Company estimates that customers will request refunds for 1.5 % of sales and estimates that merchandise costing $16,000 will be returned. Assume that on February 3, 2017 Anderson Co. returned merchandise with a selling price of $5,000 for a cash refund. The returned merchandise originally cost Zell Company $3,100. (a) Journalize the adjusting entries on December 31, 2016 to record the expected customer returns. (b) Journalize the entries to record the returned merchandise and cash refund to Anderson Co.

To determine

Sales is an activity of selling the merchandise inventory of a business.

To Record: The adjusting entry for estimated customer allowances and returns.

Explanation
  1. a. Record the journal entry for the estimated customer allowance.
Date Accounts and Explanation Debit ($) Credit ($)
December 31, 2016 Sales 27,000 (1)  
  Customer Refunds Payable   27,000
  (To record the sale of inventory on account after discount)    

Table (1)

Working Note:

Calculate the amount of sales.

Sales = $1,800,000

Estimated percent of refunds = 1.5%

Amount of sales = Sales×Estimated percent ofrefunds$1,800,000×1.5%=$27,000 (1)

  • Sales is revenue and it decreases the value of equity by $27,000. Therefore, debit sales with $27,000.
  • Customer refunds payable is a liability and it increased by $27,000. Therefore, credit customer refunds payable account with $27,000.

Record the journal entry for the return of the merchandise.

Date Accounts and Explanation Debit ($) Credit ($)
December 31, 2016 Estimated Returns Inventory 16,000  
  Cost of Merchandise Sold   16,000
  (To record the return of the merchandise)    

Table (2)

  • Estimated retunrs inventory is an expense account and it decreases the value of equity by $16,000

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