Question

Botanic Choice sells natural supplements to customers with an unconditional sales return if they are not satisfied. The sales returns period extends 60 days. On February 10, 2018, a customer purchases $4,000 of products (cost $2,000). Assuming that based on prior experience, estimated returns are 20%. The journal entry to record the actual return of $250 of merchandise includes a

a. credit to Allowance for Sales Returns for $250.

b. credit to Returned Inventory for $125.

c. debit to Returned Inventory for $125.

d. debit to Estimated Inventory Returns for $125.

Answer 1

The correct journal entry for recording the actual return of $250 of merchandise by a customer is a debit to the Allowance for Sales Returns for $250 and a credit to Revenue for the same amount. This adjusts the sales revenue for the return and would also require adjusting the inventory accounts to reflect the cost of the returned merchandise.

Step-by-step explanation:

The student is asking about the journal entry needed to record an actual return of merchandise in a situation where a company allows unconditional sales returns, and has estimated returns based on prior experience. The question is related to accounting practices for recording sales and the subsequent returns of inventory.

In this scenario, Botanic Choice sold $4,000 worth of products with a cost of $2,000 and estimated returns of 20%. When a customer actually returns $250 of merchandise, the correct journal entry would be:

• Debit to Allowance for Sales Returns for $250.
• Credit to Revenue (or Sales) for $250.

The cost of the returned inventory would also involve reversing the cost of goods sold by debiting Inventory and crediting Cost of Goods Sold for the cost of the returned merchandise, which would likely be a proportional part of the $125 corresponding to the $250 retail value assuming a consistent markup.

Answer 2

Option (c) is correct.

Step-by-step explanation:

The Journal entries are as follows:

(a) Sales Returns & Allowance A/c Dr. $250

To Account Receivable $250

(To record the accounts receivable)

(b) Returned Inventory A/c Dr. $125

To Cost of Goods Sold $125

(To record the actual return)

Workings:

Returned Inventory = 250 × (2000 ÷ 4000)

= $125