Final answer:
On January 2, 2017, Organic Growth Company will record the sale of seeds on account and estimate a 20% return rate by crediting Sales Revenue for 80% of the total sales and crediting Estimated Returns Inventory for the remaining 20%. The cost of goods sold is debited and the inventory is credited for the full cost amount.
Step-by-step explanation:
Organic Growth Company must account for the possibility of returns when they record the sale. Since they estimate that 20% of the seeds are likely to be returned, this must be reflected in the journal entries. The correct journal entry on January 2, 2017, recognizing the sale and the estimated sales returns will be as follows:
- Debit Accounts Receivable $1,500,000
- Credit Sales Revenue $1,200,000 (80% of $1,500,000)
- Credit Estimated Returns Inventory $300,000 (20% of sales)
- Debit Cost of Goods Sold $750,000
- Credit Inventory $750,000
This entry records the sale while also setting aside the portion that might be returned. The Estimated Returns Inventory account reflects the inventory that is expected to come back, based on the company's return estimate.