Question

On August 5, Michaels Ltd. sells goods for $1,500 and the cost to Michaels was $800. Michaels expects a return rate of 5%. On August 12, goods with a selling price of $400 and a cost of $215 are returned for credit and restored to inventory. The journal entry to record the return will include

Select one:

a. credit to Estimated Inventory Returns for $215.

b. debit to Accounts Receivable for $400.

c. credit to Refund Liability for $400.

d. credit to Inventory for $215.

Answer 1

Answer - a) credit to Estimated Inventory Returns for $215.

When a business expects  a return and estimated a return rate of 5%, it creates a Estimated inventory return .

In This casse Micheals Ltd expected a 5% return and created a Estimated inventory return at the time of sale @ 5% of $ 800 . The entry will be as follows

Esimated Inventory Return $ 400 Debit

Cost of Goods Sold $ 400 Credit

When the actual returns ocuurs , credit to Estimated Inventory Returns for $215 will be recorded