Question

Five Dollar Stores (FDS) sells merchandise for cash. It began 2016 with a refund liability of $0, made sales of $1,000,000 during 2016 which cost FDS $600,000 (or 60%), estimates that 1% of all sales will be returned, and experiences $8,000 of returns during 2016. When accruing its estimate of remaining returns at the end of 2016, FDS would debit Inventory—estimated returns and credit COGS for:

a. $6,000.
b. $4,800.
c. $1,200.
d. $0.

Answer 1

FDS would debit Inventory—estimated returns and credit COGS for $4,800.

Step-by-step explanation:

When accruing estimated returns at the end of 2016, FDS would debit Inventory—estimated returns and credit COGS for $4,800.

To calculate the amount, we need to determine the estimated returns FDS expects based on its sales. FDS estimates that 1% of all sales will be returned. So, 1% of $1,000,000 is $10,000. However, FDS has already experienced $8,000 of returns during 2016, so the estimated returns at the end of 2016 would be $10,000 - $8,000 = $2,000.

The remaining returns are recorded as a debit to Inventory—estimated returns and a credit to COGS. Since returning merchandise reduces the value of inventory and increases the cost of goods sold, the entry would be a debit to Inventory—estimated returns for $2,000 (the estimated returns) and a credit to COGS for the same amount.