Question

Kingbird-Air is selling a new model of high-efficiency air conditioner. To stimulate interest, Kingbird-Air is granting certain large customers the unconditional right to return these air conditioners if not fully satisfied. The right of return extends for six months. Kingbird-Air estimates returns of 9%. Kingbird-Air sells these air conditioners on account for $18,800,000 (cost $11,280,000) on April 2, 2017. Customers are required to pay the full amount due by June 15, 2017.

(a) Prepare the journal entry for Kingbird-Air on April 2, 2017. Use the net method to record sales.

(b) Assume that on May 15, 2017 one customer returns air conditioners that it purchased from Kingbird-Air for $406,000. Prepare the journal entry to record this transaction and the receipt of cash from customers on June 15, 2017.

(c) Assume Kingbird-Air prepares financial statements quarterly. Prepare the necessary entries (if any) to adjust Kingbird-Air’s financial results for the above transactions on June 30, 2017, assuming remaining expected returns of $1,210,000.

Answer 1

	Cost to sales ratio (11280000/18800000)	60%
Date	Account title	Debit	Credit
April 2, 2017	Accounts receivable	18,800,000
	Refund Liability (18800000*9%)		1,692,000
	Sales revenue		17,108,000
	(To record sales revenue.)
	Cost of goods sold (11280000*(1-9%))	10,264,800
	Inventory		10,264,800
	(To record cost of goods sold.)
	Estimated Return Inventory (11280000*9%)	1,015,200
	Inventory		1,015,200
	(To record estimated returns.)
May 15, 2017	Refund Liability	406,000
	Accounts receivable		406,000
	(To record sales returns)
	Returned Inventory (406000*60%)	243,600
	Estimated Return Inventory		243,600
	(To record cost of goods returned)
June 15, 2017	Cash (18800000-406000)	18,394,000
	Accounts receivable		18,394,000
	(To record Cash collection from customer.)
June 30, 2017	Estimated Return Inventory	438,400
	Inventory		438,400
	(To record estimated returns.)

April 2, 2017	Estimated Return Inventory	1,015,200
May 15, 2017	cost of goods returned	(243,600)
	Unadjusted Estimated Return Inventory	771,600
	Adjusted Estimated Return Inventory	1,210,000
	Less: Unadjusted Estimated Return Inventory	771,600
	Adjusting entry for Estimated Return Inventory	438,400