Question

On 2/1/YR 1, the Seller delivered goods to the Purchaser in the amount of $7,000 which are not to the Purchaser's specifications. At the time of the delivery of the goods, the Purchaser had not yet paid for the goods, and the Purchaser planned to pay for them in 3/1/YR 1 (i.e., the following month) in accordance with the credit terms offered by the Seller. Identifying that the goods are not conforming, the Purchaser, on 2/2/YR 1, returns to the Seller half of the goods delivered and asks for a $3,500 reduction in the amount owed to the Seller. When the goods are returned, the Seller returns the goods to its inventory. The costs of the returned goods is $1000.

1. Under the periodic method of accounting for inventories, consider the journal entry for the return transaction in Fact Pattern D, above, from the Purchaser's perspective as of 2/2/YR 1. The Purchaser will:

a. Credit Account Receivable for $3500.

b. Credit Account Payable for $3500.

c. Credit Purchase Returns for $3500.

d. Credit Inventory for $3500.

e. Credit Sales Returns for $3500.

Under the periodic method of accounting for inventories, consider the journal entry for the return transaction in Fact Pattern D, above, from the Seller's perspective as of 2/2/YR 1. The Seller will:

a. Debit Account Receivable for $3500.

b. Debit Inventory for $1000.

c. Debit Purchase Returns for $3500.

d. Credit COGS for $3500.

e. None of the above are correct.

Under the perpetual method of accounting for inventories, consider the journal entry for the return transaction in Fact Pattern D, above, from the Seller's perspective as of 2/2/YR 1. The Seller will:

a. Debit Account Receivable for $3500.

b. Debit Inventory for $1000.

c. Debit Purchase Returns for $3500.

d. Credit COGS for $3500.

e. None of the above are correct.

Answer 1

1. Under periodic method of accounting for inventory, the inventory level is not kept up to date with each and every transaction. So, when goods are purchased, the purchaser will have debited Purchase Expense and credited Accounts Payable.

When goods are returned, he will debit Accounts Payable and credit Purchase Returns.

Answer is option c. Credit Purchase Returns for $3500.

2. Since the seller also maintains a periodic method of accounting for inventories, at the date of sale, he will have debited Accounts Receivable and credited sales.

When goods are returned, he will debit Sales Returns and credit Accounts Receivable.

Answer is option e. None of the above are correct.

3. When the seller follows the perpetual method of accounting for inventories, at the date of sale, he will have passed 2 entries:

Date	Account name and description	Debit	Credit
2/1/YR 1	Accounts Receivable	7000
	Sales Revenue		7000
	(Entry to record sales)
2/1/YR 1	Cost of goods sold	2000
	Inventory (Entry to record cost of goods sold)		2000

And when the goods are returned, he will pass the 2 following entries:

Date	Account name and description	Debit	Credit
2/2/YR 1	Sales Return	3500
	Accounts Receivable		3500
	(Entry to record sales return)
2/2/YR 1	Inventory	1000
	Cost of Goods Sold		1000
	(Entry to record cost of goods sold)

Therefore, the answer is option b. Debit Inventory for $1000.

​​​​​​​Hope this helps :)