91Ó°ÊÓ

On October 2, 2017, Laplante Company sold \(6,000 of its elite camping gear (with a cost of \)3,600) to Lynch Outfitters. As part of the sales agreement, Laplante includes a provision that if Lynch is dissatisfied with the product, Laplante will grant an allowance on the sales price or agree to take the product back (although returns are rare, given the long-term relationship between Laplante and Lynch). Lynch expects total allowances to Lynch to be \(800. On October 16, 2017, Laplante grants an allowance of \)400 to Lynch because the color for some of the items delivered was a bit different than what appeared in the catalog.

Instructions

1. Prepare journal entries for Laplante to record (1) the sale on October 2, 2017, (2) the granting of the allowance on October 16, 2017, and,
2. Any adjusting required on October 31, 2017 (when Laplante prepares financial statements). Laplante now estimates additional allowances of $250 will be granted to Lynch in the future.
3. Indicate the income statement and balance sheet reporting by Laplante at October 31, 2017, of the information related to the Lynch transaction.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Adjusting Entries

Adjusting entries are journal entries recorded in the books of a business entity at the end of a particular period to ensure thatrevenues and expenses are correctly statedaccording to an associated accounting period.

02

Preparation of journal entries

Date	Accounts and Explanation	Debit ($)	Credit ($)
2017
Oct 2	Accounts receivable	6,000
	Sales revenue		6,000
	(To record the sales)
Oct 2	Cost of goods sold	3,600
	Merchandise inventory		3,600
	(To record the cost of goods sold)
Oct 16	Sales returns and allowance	400
	Accounts receivable		400
	(To record sales return)
Oct 16	Merchandise inventory (Working note)	240
	Cost of goods sold		240
	(To record the reversal of cogs)

Working Note:

Computation of amount of inventory for sales return:

$\begin{array}{c}\text{Inventory for the sales return}=\frac{\text{Cost of goods sold}}{\text{Selling price}}×\text{Allowance sold}\\ =\frac{\$3,600}{\$6,000}×\$400\\ =\$240\end{array}$

03

Preparation of adjusting entries

Date	Accounts and Explanation	Debit ($)	Credit ($)
2017
Oct 31	Sales return and allowance	250
	Accounts receivable		250
	(To adjust the sales returns)
Oct 31	Merchandise Inventory (Working note)	150
	Cost of goods sold		150
	(To adjust the sales returns with cogs)

Working Note:

Computation of amount of inventory for sales return:

$\begin{array}{c}\mathbf{\text{Inventory for the sales return}}\mathbf{=}\left[\frac{\text{Cost of goods sold}}{\text{Selling price}}\right]\mathbf{×}\mathbf{\text{Allowance}}\\ \mathbf{=}\left[\frac{\$3,600}{\$6,000}\right]\mathbf{×}\mathbf{\$}\mathbf{250}\\ \mathbf{=}\mathbf{\$}\mathbf{150}\end{array}$

04

Reporting on income statement and balance sheet

Income Statement (Partial)
Particulars	Amounts ($)
Sales	6,000
Less: Sales returns and allowances (400+250)	(650)
Net sales	5,350
Less: Cost of goods sold (3600-240-150)	(3,210)
Gross profit	2,140

Balance Sheet (Partial)
Particulars	Amounts ($)
Current Assets
Accounts receivable (6000-400)	5,600
Less: Sales returns and allowances	(250)
Accounts receivables, Net	5,350

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