Question

MERCHANDISE INVENTORY ADJUSTMENTS: PERIODIC INVENTORY SYSTEM WITH SALES RETURNS AND ALLOWANCES

Use the information provided below to prepare a partial end-of-period spreadsheet for Karen’s Gift Shop for the year ended December 31, 20--. The ending merchandise inventory is $60,000. Karen estimates that customers will be granted $15,000 in refunds next year for merchandise sold this year. The estimated cost of the returned inventory is $10,000.

1. Complete the Adjustments columns for merchandise Inventory and related accounts.

2. Extend all accounts to the Adjusted Trial Balance columns.

3. Prepare the cost of goods sold section from the spreadsheet.

Answer 1

 

Merchandise inventory is the item that is purchased to resell to the customers. The amount of merchandise inventory at the start of a period is known as the beginning balance of inventory.

The inventory is purchased from the suppliers and sold to the customer during the accounting period. After buying and selling the inventory, some inventory may remain unsold. The unsold inventory is known as the ending inventory of the firm. 

At the end of the year, it is expected that an inventory amounting to $15,000 will be returned by the customer in the next year. The estimated inventory return must be adjusted in the books with the cost of the returned inventory.

The estimated return inventory will affect the estimated return inventory account and customer refund payable account, and income summary. The estimated returns inventory will be adjusted with the cost of the estimated returns inventory. The customer refund payable will be adjusted with the estimated refund amount. The difference between the two will affect the income summary.

The trial balance will be adjusted as follows:

	Unadjusted		Adjustments
	Debit	Credit	Debit	Credit
Merchandise inventory	55,000
Estimated returns inventory	8,000		10,000
Customer refund payable		12,000		15,000
Income Summary			5,000
Sales		280,000
Sales returns and allowances	18,000
Purchases	200,000
Purchase returns and allowances		3,000
Purchase discounts		2,500
Freight-in	1,400

 

 The adjusted trial balance can be prepared by adapting to the unadjusted trial balance. The new account balance will be reported on the adjusted trial balance. The adjusted trial balance can be prepared as follows:

	Unadjusted		Adjustments		Adjusted
	Debit	Credit	Debit	Credit	Debit	Credit
Merchandise inventory	55,000				55,000
Estimated returns inventory	8,000		10,000		18,000
Customer refund payable		12,000		15,000		27,000
Income Summary			5,000		5,000
Sales		280,000				280,000
Sales returns and allowances	18,000				18,000
Purchases	200,000				200,000
Purchase returns and allowances		3,000				3,000
Purchase discounts		2,500				2,500
Freight-in	1,400				1,400

 

 The cost of goods sold section can be prepared by adjusting the beginning inventory, purchases, return and allowances, purchase discount, and ending list. It can be designed as follows:

Beginning inventory		$55,000
Net purchase
Purchase	$200,000
Less: Purchase returns and allowances	-3,000
Less: Purchase discounts	-2,500	194,500
Less: ending inventory		-60,000
Cost of goods sold		189,500

Therefore, the cost of goods sold is $189,500

 

 

Answers can be found in the Explanation section.