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Chapter 5: Q5-15RQ (page 294)

Under the new revenue recognition standard, what most companies do at the end of the period related to sales returns? Describe the journal entries that would be recorded.

Short Answer

Expert verified

As per the newrevenue recognition standard, the companies must compute the net amount at the end of the period related to sales returns and estimate therefunds payable balances.

Step by step solution

01

Meaning of Sales Returns

In accounting, sales returns refer to thegoods returned by the buyer to the seller due to any damages, defects, or any other issue. Such returns decrease thesales revenues of thebusiness concern.

02

Companies’ responsibility at the end of the period

At the end of the accounting period, companies must compute thenet amount after the settlement of all the applicable discounts.

In addition, as per the new revenue recognition standard,refunds payable are required to be estimated and recorded.

03

Journal entries required

Date

Accounts and Explanation

Debit ($)

Credit ($)

Sales revenue

XXX

Refunds payable

XXX

(To record the refunds payable)

Estimated returned inventory

XXX

Cost of goods sold

XXX

(To record the cost of goods sold)

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Most popular questions from this chapter

Suppose Piranha.com sells 3,500 books on account for \(17 each (cost of these books is \)35,700) on October 10, 2018 to The Textbook Store. One hundred of these books (cost $1,020) were damaged in shipment, so Piranha.com later received the damaged goods from The Textbook Store as sales returns on October 13, 2018.

Requirements

1. Journalize The Textbook Store鈥檚 October 2018 transactions.

2. Journalize Piranha.com鈥檚 October 2018 transactions. The company estimates sales returns at the end of each month.

Party-Time T-Shirts sells T-shirts for parties at the local college. The company completed the first year of operations, and the shareholders are generally pleased with operating results as shown by the following income statement:

PARTY-TIME T-SHIRTS

Income Statement

Year Ended December 31, 2017

Net Sales Revenue \(350,000

Cost of Goods Sold 210,000

Gross Profit 140,000

Operating Expenses:

Selling Expense 40,000

Administrative Expense 25,000

Net Income \)75,000

Bill Hildebrand, the controller, is considering how to expand the business. He proposes two ways to increase profits to \(100,000 during 2018.

a. Hildebrand believes he should advertise more heavily. He believes additional advertising costing \)20,000 will increase net sales by 30% and leave administrative expense unchanged. Assume that Cost of Goods Sold will remain at the same percentage of net sales as in 2017, so if net sales increase in 2018, Cost of Goods Sold will increase proportionately.

b. Hildebrand proposes selling higher-margin merchandise, such as party dresses, in addition to the existing product line. An importer can supply a minimum of 1,000 dresses for \(40 each; Party-Time can mark these dresses up 100% and sell them for \)80. Hildebrand realizes he will have to advertise the new merchandise, and this advertising will cost $5,000. Party-Time can expect to sell only 80% of these dresses during the coming year.

Help Hildebrand determine which plan to pursue. Prepare a multi-step income statement for 2018 to show the expected net income under each plan.

What is the Cost of Goods Sold (COGS), and where is it reported?

Dobbs Wholesale Antiques makes all sales under terms of FOB shipping point. The company usually ships inventory to customers approximately one week after receiving the order. For orders received late in December, Kathy Dobbs, the owner, decides when to ship the goods. If profits are already at an acceptable level, Dobbs delays shipment until January. If profits for the current year are lagging behind expectations, Dobbs ships the goods during December.

Requirements

1. Under Dobbs鈥檚 FOB policy, when should the company record a sale?

2. Do you approve or disapprove of Dobbs鈥檚 manner of deciding when to ship goods to customers and record the sales revenue? If you approve, give your reason. If you disapprove, identify a better way to decide when to ship goods. (There is no accounting rule against Dobbs鈥檚 practice.)

Click Computers has the following transactions in July related to purchasing and sale of merchandise inventory.

July 1 Purchase of \(20,500 worth of computers on account, terms of 2/10, n/30.

3 Return of \)4,000 of the computers to the vendor.

9 Payment made on the account.

12 Sold computers on account for $8,000 to a customer, terms 3/15, n/30.

26 Received payment from customer on balance due.

Journalize the transactions for Click Computers assuming that the company uses the periodic inventory system.
See all solutions

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