Question

A customer purchased bench from Harrington Stores for $1,250. The bench had originally cost Harrington $450. When the bench was delivered, the customer noted that the color was unsatisfactory in that it did not match that of the model in the store. The customer asked for an allowance and kept the bench, while Harrington gave the customer $150 cash. Prepare the appropriate journal entry recorded by Harrington for this allowance.

Answer 1

The journal entry for the allowance given by Harrington Stores includes a debit to Sales Returns and Allowances for $150 and a credit to Cash for the same amount. This reflects both the reduction in revenue and the decrease in cash due to the $150 cash allowance provided.

Step-by-step explanation:

When Harrington Stores agreed to give the customer a $150 cash allowance due to the color mismatch of the bench, this affects both revenue and cash. The journal entry to record this transaction involves a debit to Sales Returns and Allowances and a credit to Cash.

Journal Entry:

• Debit Sales Returns and Allowances: $150
• Credit Cash: $150

This entry reduces the revenue initially recognized from the sale by the allowance amount, and it also reduces the cash balance to reflect the cash given back to the customer. Note that this is a simplified entry and assumes that the initial revenue from the sale has already been fully recognized. If sales tax or other adjustments are involved, additional entries may be necessary.

Answer 2

Journal entry recorded by Harrington for this allowance:

Revenue $ 450 (debit)

Account Receivable / Cash $450 (credit)

Step-by-step explanation:

Recording the Sale

When customer purchased bench from Harrington Stores for $1,250 the journal entry is shown as:

Account Receivable/Cash $1250(debit)

Revenue $ 1250 (credit)

This Journal recognises an Income - Revenue and an Asset - Account Receivable when to depict the flow of economic benefits into the entity

Cost of Sale $450 (debit)

Inventory $450(debit)

The above journal records the cost of sale and de-recognises the assets of inventory Bench after the sale is made.

Recording the Allowance

When the allowance is granted economic benefits are flowing out of the entity as a result of decrease in Assets of Cash or Assets of Account Receivable.

We also derecognise the revenue attached to the allowance

Revenue $ 450 (debit)

Account Receivable/Cash $450 (credit)