Question

E18-8B (L03) (Sales with Returns) Natural Growth Company is presently testing a number of new agricultural seeds that it has recently harvested. To stimulate interest, it has decided to grant to five of its largest customers the unconditional right of return to these products if not fully satisfied. The right of return extends for 4 months. Natural Growth sells these seeds on account for $1,800,000 (cost $950,000) on January 2, 2017. Customers are required to pay the full amount due by March 15, 2017.

Instructions

(a) Prepare the journal entry for Natural Growth at January 2, 2017, assuming Natural Growth estimates returns of 20% based on prior experience.

(b) Assume that one customer returns the seeds on March 1, 2017, due to unsatisfactory performance. Prepare the journal entry to record this transaction, assuming this customer purchased $120,000 of seeds from Natural Growth.

(c) Briefly describe the accounting for these sales if Natural Growth is unable to reliably estimate returns.

Answer 1

Date	Particulars	Debit ($)	Credit($)
a.	Account receivables	1,800,000
	Sales (1800,000*80%)		1,440,000
	Refund liability (1800,000*20%)		360,000
	(To record sales)
b.	Refund Liability	120,000
	Account receivables		120,000
	(To record refund )
c.	Accounts receivables	1,800,000
	Sales		1,800,000
	(To record sales)
	Sales return and allowance	120,000
	Accounts receivable		120,000
	(To record sales return)

Note that in point c, when Natural growth company is unable to reliably estimate sales, the full revenue shall be recognized in the year of sales as per revenue recognition concept.

kindly upvote