Question

During 2021, Hawthorne Manufacturing Company sold merchandise of $2,000,000 cash. This merchandise cost Hawthorn $1,200,000. Industry experience indicates that 10% of all sales will be returned. Customers returned $130,000 of sales during 2021. Hawthorne uses a perpetual inventory system. An additional $70,000 of sales return are expected. The cost of this inventory expected to be returned is $42,000. What are the proper journal entries for a. the sale of $2,000,000 b. sales return of $130,000 and c. $70,000 of sales return expected?

Answer 1

The journal entries for the given transactions are as follows: a. Sale of $2,000,000: Cash is debited, Sales Revenue is credited, Cost of Goods Sold is credited, and Merchandise Inventory is credited. b. Sales return of $130,000: Sales Returns and Allowances is debited, Merchandise Inventory is debited, and Cash is credited. c. Sales return expected of $70,000: Sales Returns and Allowances is debited, Estimated Returns Inventory is debited, and Merchandise Inventory is credited.

Step-by-step explanation:

The proper journal entries for the given transactions are as follows:

a. Sale of $2,000,000:

• Debit: Cash - $2,000,000
• Credit: Sales Revenue - $2,000,000
• Credit: Cost of Goods Sold - $1,200,000
• Credit: Merchandise Inventory - $800,000 ([$2,000,000 - $1,200,000] - [$130,000 + $70,000 - $42,000])

b. Sales return of $130,000:

• Debit: Sales Returns and Allowances - $130,000
• Debit: Merchandise Inventory - [$130,000 + $42,000] - $172,000
• Credit: Cash - $130,000

c. Sales return expected of $70,000:

• Debit: Sales Returns and Allowances - $70,000
• Debit: Estimated Returns Inventory - $42,000
• Credit: Merchandise Inventory - $70,000