Question

(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;
(a) Prepare the journal entry for Organic Growth at January 2, 2017.
(b) Assume that one customer returns the seed son March1,2017,due to unsatisfactory performance.Prepare the journal entry to record this transaction, assuming this customer purchased $100,000 of seeds from Organic Growth.
(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

The journal entries for Organic Growth Company are as follows: (a) On January 2, 2017, Accounts Receivable and Sales Revenue are credited, while Cost of Goods Sold and Inventory are debited. (b) On March 1, 2017, Returns and Allowances is debited and Accounts Receivable is credited. (c) On March 31, 2017, Estimated Returns is debited and Allowance for Sales Returns is credited.

Step-by-step explanation:

(a) Journal entry for January 2, 2017:

Accounts Receivable $1,500,000

Sales Revenue $1,500,000

Cost of Goods Sold $750,000

Inventory $750,000

(b) Journal entry for March 1, 2017:

Returns and Allowances $100,000

Accounts Receivable $100,000

(c) Journal entry to adjust financial statements on March 31, 2017:

Estimated Returns $200,000

Allowance for Sales Returns $200,000