Question

For the year ended December 31, 2017, Modern Furniture made total sales of $1,000,000 but expects to receive requests for refunds of returned or damaged merchandise that are 2% of total sales. The company also expects to receive returns of merchandise costing $12,000. Prepare the adjusting entries required at year-end if 2017 is the company’s first year of operations. (5.5 pts)

Date	Account Titles	Debits	Credits

Assume that the following year Modern Furniture (from problem #3) paid a refund of $4,500 for inventory costing $2,500. Prepare the journal entry to record this payment and reduction in inventory, which occurred on January 22, 2018. (5 pts)

Answer 1

The adjusting entries required at year-end if 2017 is the company’s first year of operations, are as under:

Date	Accounts	Debit	Credit
December 31, 2017	Sales Return Allowance A/c	$ 20,000
	To Refund Liability A/c		$ 20,000
	(recorded allowances for sales return @ 2% of sales)
December 31, 2017	Inventory-estimated return A/c	$ 12,000
	To Cost of goods sold A/c		$ 12,000
	(recorded estimated return of inventory for $ 12,000 )

Sales return allowance = $ 1,000,000 * 2% = $ 20,000

Journal entry to be posted as under record payment and reduction in inventory, which occurred on January 22, 2018

Date	Accounts	Debit	Credit
January 22, 2018	Refund Liability A/c	$    4,500
	To Accounts Receivable		$    4,500
	(recorded refund to customer for sales return )
December 31, 2017	Inventory A/c	$    2,500
	To Inventory-estimated return A/c		$    2,500
	(recorded receipt of inventory on account of sales return)