Question

On March 15, EtCo, which uses the perpetual method, sells on account $50,000 of computers for which it had paid $25,000. That same month, 20% of the computers are returned before the buyer pay the invoices. What is the journal entry to record these returns?

a. Sales Returns 10,000 Accounts Receivable 10,000 Inventory 5,000 Purchase Returns 5,000
b. Sales Returns 10,000 Accounts Receivable 10,000
c. Sales Returns 10,000 Inventory 5,000 Accounts Receivable 10,000 Cost of Goods Sold 5,000
d. Sales Returns 10,000 Gross Profit 5,000 Accounts Receivable 5,000

Answer 1

The correct journal entry to record the return of 20% of the computers sold by EtCo is Sales Returns 10,000 and Accounts Receivable 10,000. Option b is the accurate choice since it reflects both the decrease in sales and the reduction in the amount owed by the customer.

Step-by-step explanation:

The student is asking about making a journal entry to record the return of computers under the perpetual inventory system in accounting.

When 20% of the computers worth $50,000 were returned before the buyer paid the invoices, EtCo would need to account for both the reduction in sales and the corresponding merchandise inventory that was returned. The correct journal entry to record these returns is option b, which is:

The amount of $10,000 represents the 20% of the total sales that were returned. Since this entry is being made under the perpetual inventory system, there is no immediate effect on the Inventory or Cost of Goods Sold accounts at the time of the return. Instead, those adjustments would be made when reconciling inventory periodically. By choosing the mentioned correct option in the final answer, we are reflecting that the seller is reducing the amount owed by the customer (Accounts Receivable) and acknowledging that the sale was reversed (Sales Returns).