Question

On February 1, 2017 Whitus Company sells 300 hard drives for 200 each on account to Walsh Company. Whitus allows Walsh to return any used hard drives within 30 days of purchase. The cost to Whitus of each hard drive is 120. On February 24, 2017 Walsh returns six hard drives because they are defective. On February 28, 2017, Whitus prepares financial statements and determines that it is likely that only two more hard drives will be returned. Which of the following will be part of a correct entry by Whitus?

1) Debit Accounts Receivable for $60,000
2) Credit Sales Revenue for $60,000
3) Debit Sales Returns and Allowances for $1,200
4) Credit Accounts Receivable for $1,200

Answer 1

The correct option is 3). A correct entry by Whitus after the return of six defective hard drives on February 24, 2017, would be to Debit Sales Returns and Allowances for $1,200 and Credit Accounts Receivable for $1,200.

Step-by-step explanation:

The student's question relates to the accounting treatment of a sales transaction that involves the possibility of product returns. Whitus Company made a sale on account to Walsh Company on February 1, 2017, which means Walsh Company has the right to pay at a later date. The transaction initially would have been recorded as a Debit to Accounts Receivable and a Credit to Sales Revenue for the total sales amount (300 hard drives at $200 each), resulting in $60,000. When Walsh Company returned six hard drives, Whitus Company would have to adjust their accounts to reflect the return.

The correct accounting entry for the six returned hard drives on February 24, 2017, would be:

• Debit Sales Returns and Allowances for $1,200 (6 hard drives x $200 each).
• Credit Accounts Receivable for $1,200 to reduce the amount owed by Walsh Company.

This reflects that the sales revenue initially recognized needs to be reduced by the amount corresponding to the returned goods. The estimation of two more hard drives being returned is an adjustment that reflects expectation rather than an actual return, this adjustment would involve estimating an allowance for sales returns but is not part of the options provided, hence it's not an appropriate entry to choose here.