Question

Lacey Company recorded credit sales of $4,400,000 for the current year ended December 31. During the current year, the company recorded actual returns of $55,000 . As of December 31, Lacey estimates sales returns at 3% of current year sales, originally made on account. It is the company’s policy to provide refunds on account. Lacey uses a perpetual inventory system and records estimated returns at the end of the period. The balance in Refund Liability was $39,600 and the balance in Inventory—Estimated Returns was $15,840 on January 1 of the current year.

a. Prepare the journal entries to record sales and cost of goods sold for the current year. Assume all sales are on account and cost of goods sold is 40% of the selling price.
b. Prepare the journal entries to record actual returns during the current year. Include the cost of goods sold entry.
c. Prepare the adjusting entries related to estimated returns on December 31. Include the cost of goods sold entry.

Answer 1

To record the credit sales and cost of goods sold, make the journal entries: Accounts Receivable: $4,400,000; Sales Revenue: $4,400,000; Cost of Goods Sold: $1,760,000; and Inventory: $1,760,000. For actual returns, record: Sales Returns and Allowances: $55,000; Accounts Receivable: $55,000; Inventory: $22,000; and Cost of Goods Sold: $22,000. For adjusting entries for estimated returns, make: Refund Liability: $39,600; Sales Returns and Allowances: $39,600; Inventory—Estimated Returns: $23,760; and Cost of Goods Sold: $23,760.

Step-by-step explanation:

To record the credit sales and cost of goods sold for the current year, the following journal entries should be made:

For credit sales:
Accounts Receivable: $4,400,000
Sales Revenue: $4,400,000

For cost of goods sold:
Cost of Goods Sold: $1,760,000
Inventory: $1,760,000

To record the actual returns during the year, the following journal entries should be made:

For returns:
Sales Returns and Allowances: $55,000
Accounts Receivable: $55,000

For cost of goods sold:
Inventory: $22,000
Cost of Goods Sold: $22,000

To record the adjusting entries for estimated returns on December 31, the following entries should be made:

For refund liability:
Refund Liability: $39,600
Sales Returns and Allowances: $39,600

For inventory estimated returns:
Inventory—Estimated Returns: $23,760
Cost of Goods Sold: $23,760

Answer 2

To record sales and cost of goods sold for the current year, you would debit Accounts Receivable and credit Sales. The journal entries for actual returns and estimated returns involve debiting Sales Returns and Allowances and crediting Accounts Receivable and Refund Liability respectively.

Step-by-step explanation:

To record sales and cost of goods sold for the current year, we need to calculate the cost of goods sold and then make the necessary journal entries. The cost of goods sold is 40% of the selling price, so it would be $4,400,000 * 0.40 = $1,760,000. The journal entries would be:

1. Debit Accounts Receivable $4,400,000
2. Credit Sales $4,400,000
3. Debit Cost of Goods Sold $1,760,000
4. Credit Inventory $1,760,000

The journal entries to record actual returns during the current year would be:

1. Debit Sales Returns and Allowances $55,000
2. Credit Accounts Receivable $55,000
3. Debit Inventory $44,000
4. Credit Cost of Goods Sold $44,000

To record the adjusting entries related to estimated returns on December 31, we need to calculate the estimated returns and then make the necessary journal entries. The estimated returns would be $4,400,000 * 0.03 = $132,000. The journal entries would be:

1. Debit Sales Returns and Allowances $132,000
2. Credit Refund Liability $132,000
3. Debit Cost of Goods Sold $52,800
4. Credit Inventory $52,800