Question

On January 5, 2019, ShoeKing Corp. sells for cash 500 pairs of volleyball shoes to FootAction, a shoe retailer, for $70 each. FootAction has the right to return the shoes for any reason up to March 31, 2019, for a full refund. The cost of each pair of shoes is $32. ShoeKing predicts that it is probable that 40 pairs of the shoes will be returned. ShoeKing uses the perpetual method for inventory.

Required:

1.	Prepare ShoeKing’s journal entry on January 5, 2019, to account for this transaction.
2.	Assume that FootAction returns 35 pairs of shoes on March 31, 2019. Prepare the journal entry to record this return.

CHART OF ACCOUNTSShoeKing CorporationGeneral Ledger

	ASSETS
111	Cash
121	Accounts Receivable
141	Inventory
142	Return Asset
152	Prepaid Insurance
181	Equipment
198	Accumulated Depreciation

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
250	Unearned Revenue
251	Return Liability
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
910	Income Tax Expense

1. Prepare ShoeKing’s journal entries on January 5, 2019, to account for this transaction.

General Journal Instructions

All transactions on this page must be entered (except for post ref(s)) before you will receive Check My Work feedback.

PAGE 1

GENERAL JOURNAL

Score: 55/75

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6

Points:

10.27 / 14

Feedback

Check My Work

Watch the ‘Show me how’ video for help with this problem. The company uses two accounts: Return Liability and Return Asset in the sales entry and cost of sales entry, respectively.

2. Assume that FootAction returns 35 pairs of shoes on March 31, 2019. Prepare the journal entries to record this return.

1.	Record the entry on March 31 to refund the customer, clear the return liability account at the end of the return period, and record sales of unreturned merchandise.
2.	Record the entry on March 31 to account for returning inventory to stock, clear the return asset account at the end of the return period, and record cost of sales of unreturned merchandise.

General Journal Instructions

All transactions on this page must be entered (except for post ref(s)) before you will receive Check My Work feedback.

PAGE 1

GENERAL JOURNAL

Score: 54/75

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6

Answer 1

a. Journal Under Perpetual Inventory System

Under perpetual inventory system, track of stock is kept at each step & hence wherever transaction impact inventory, inventory account is either debited or credited.

Date	Accounts	Debit	Credit
5th Jan	Cash (500*70)	35,000.00
	Sales Revenue		35,000.00
5th Jan	Cost of Goods Sold (500*32)	16,000.00
	Inventory		16,000.00
5th Jan	Sales Return (40*70)	2,800.00
	Allowance for Sales Return		2,800.00
5th Jan	Inventory - Estimated Return (40*32)	1,280.00
	Cost of Good Sold		1,280.00
31st Mar	Allowance for Sales Return (40*70)	2,800.00
	Cash (35*70)		2,450.00
	Sales Return (5*70)		350.00
31st Mar	Inventory (35*32)	1,120.00
	Cost of Good Sold (5*32)	160.00
	Inventory - Estimated Return (40*32)		1,280.00

Journal Entry using Return Liability and Return Asset in the sales entry and cost of sales entry, respectively :

Under this method Return Liability will be used in place of allowance for sales return and Return Asset will be used in place of Inventory - Estimated Return

Date	Accounts	Debit	Credit
5th Jan	Account Receivable (500*70)	35,000.00
	Sales Revenue		35,000.00
5th Jan	Cost of Goods Sold (500*32)	16,000.00
	Inventory		16,000.00
5th Jan	Sales (40*70)	2,800.00
	Return Liability		2,800.00
5th Jan	Return Asset (40*32)	1,280.00
	Cost of Good Sold		1,280.00
31st Mar	Return Liability (40*70)	2,800.00
	Cash (35*70)		2,450.00
	Sales (5*70)		350.00
31st Mar	Inventory (35*32)	1,120.00
	Cost of Good Sold (5*32)	160.00
	Return Asset (40*32)		1,280.00