Question

Statz Company had sales of $1,800,000 and related cost of goods sold of $1,150,000 for its first year of operations ending December 31, 20Y1. Statz provides customers a refund for any returned or damaged merchandise. At the end of 20Y1, Statz Company estimates that customers will request refunds for 1.5% of sales and estimates that merchandise costing $16,000 will be returned. Assume that on February 3, 20Y2, Buck Co. returned merchandise with an invoice amount of $5,000 for a cash refund. The returned merchandise originally cost Statz Company $3,100.

(a) Journalize the adjusting entries on December 31, 20Y1, to record the expected customer returns.
(b) Journalize the entries to record the returned merchandise and cash refund to Buck Co. on February 3, 20Y2.

Answer 1

A. Dec 31

Dr Sales $27,000

Cr Customer refunds payable $27,000

Dr Estimated returns inventory $16,000

Cr Cost of goods sold $16,000

B. Feb 3

Dr Customer refunds payable $5,000

Cr Cash $5,000

Dr Merchandise Inventory $3,100

Cr Estimated returns inventory $3,100

Explanation:

(a) Preparation of the adjusting entries on December 31, 20Y1, to record the expected customer returns.

Dec 31

Dr Sales $27,000

Cr Customer refunds payable $27,000

($1,800,000*1.5% )

Dr Estimated returns inventory $16,000

Cr Cost of goods sold $16,000

(b) Preparation of the entries to record the returned merchandise and cash refund to Buck Co. on February 3, 20Y2.

Feb 3

Dr Customer refunds payable $5,000

Cr Cash $5,000

Dr Merchandise Inventory $3,100

Cr Estimated returns inventory $3,100

.