Question

A company sells 100 computers for $300 each on account to a customer. The computer cost the company $125 each. The company recorded the revenue and cost of goods sold. The company allows customers a right of return which they estimate to be 2% of sales. Using the Financial Statement effects template, how should the company record the estimated returns?

Answer 1

Effect on Financial statements:

Assets

Liabilities and Stockholders' Equity

Current assets

+

Non-current assets

=

Liabilities

+

Capital

+

Retained Earnings

Cash

+

Accounts receivable

+

Inventory

Revenues

-

Expenses

=

Net income

+

$                       (600.00)

+

+

=

+

-

$   600.00

=

$     (600.00)

+

+

$   250.00

+

+

-

$ (250.00)

=

$       250.00

$                       (600.00)

$   250.00

$   350.00

$     (350.00)

($350)

($350)

Explanation:

Journal entries:

Account title and Explanation	Debit	Credit
Sales returns and Allowances [2 computers x $300]	$600
Allowances for sales returns and allowances		$600
[To record estimated sales returns]
Estimated Inventory Returns [2 computers x $125]	$250
Cost of goods sold		$250
[To record estimated cost of goods sold return]

Estimated returns = 100 computers x 2% = 2 computers.