Question

On July 10, 2020, Amodt Music sold CDs to retailers on account and recorded sales revenue of $700,000 (cost $560,000). Amodt grants the right to return CDs that do not sell in 3 months following delivery. Past experience indicates that the normal return rate is 15%. By October 11, 2020, retailers returned CDs to Amodt and were granted credit of $78,000.

Prepare Amodt's journal entries to record the sale on July 10, 2020.

Answer 1

Amodt Music should record the sale of CDs on July 10, 2020, with entries to Accounts Receivable, Sales Revenue, Cost of Goods Sold, and Inventory.

Step-by-step explanation:

On July 10, 2020, when Amodt Music records the sale of CDs to retailers, the company needs to recognize both the sale and the potential return of goods.

Here is the required journal entry to record the initial sale on July 10, 2020:

• Debit Accounts Receivable $700,000
  To record sales made on account.
• Credit Sales Revenue $700,000
  To record revenue from the sale of CDs.
• Debit Cost of Goods Sold $560,000
  To record the cost of CDs sold.
• Credit Inventory $560,000
  To reduce inventory for the cost of CDs sold.

Based on previous experience with a 15% return rate, Amodt should also make an entry to create an allowance for sales returns on the same day:

• Debit Sales Returns and Allowances $105,000 (15% of $700,000)
  To estimate and record the sales returns expected.
• Credit Allowance for Sales Returns $105,000
  To create an allowance for future returns.

Once the actual returns occur, Amodt would debit the Allowance for Sales Returns and credit Accounts Receivable to reflect the granted credit for returned CDs.