Question

ABC Ranch & Farm is a distributor of ranch and farm equipment. Its products range from small

tools, power equipment for trench-digging and fencing, grain dryers, and barn winches. Most
products are sold direct via its company catalogue and internet site. However, given some of its
speciality products, select farm implement stores carry ABC's products. Pricing and cost
information on three of ABC's most popular products are as follows
Item
Mini - trencher
Power fence hole auger
Grain/hay dryer
Standalone selling Price (Cost)
$3,600 ($2,000)
1,200 ($800)
14,000 ($11,000)
Respond to the requirements related to the following independent revenue arrangements for ABC
Ranch and Farm
a. On January 1,2019 ABC sells 40 augers to Mills Farm & Fleet for $48,000. Mills signs a
6-month note at an annual interest rate of 12%. ABC allows Mills to return any auger that
it cannot use within 60 days and receive a full refund. Based on prior experience, ABC
estimates that 5% of units sold to customers like Mills will be returned (using the most
likely outcomc approach). ABC's costs to recover the products will be immaterial and the
returned augers are expected to be resold at a profit
Required: Prepare the journal entry for ABC on January 1,2019 (6marks)​

Answer 1

1 - Notes Receivable (Dr.) $48,000

Refund liability (Cr.) $2,400

Sales Revenue (Cr.) $45,600

2 - Cost of goods Sold (Dr.) $32,000

Estimated inventory return (Cr.) $1600

Inventory (Cr.) $33,600

Step-by-step explanation:

ABC Ranch and Farm has sold 40 auger at a price of $1200 per auger. The cost per auger is 800. There is an estimate of return of 5% of units sold so the estimated return of sales will be $2,400 which is recorded as refund liability. The sales revenue is recorded with reducing the refund liability.