Question

Beethoven Music Company started business in March 2021. Sales for its first year were $400,000. Beethoven priced its merchandise to yield a 45% gross profit based on sales dollars, meaning that cost of goods sold equals 55% of sales revenue. Industry statistics suggest that 10% of the merchandise sold to customers will be returned. Beethoven estimated its sales returns based on the industry average. During the year, customers returned $30,000 in sales. Beethoven uses a perpetual inventory system, and all sales are credit sales and no discounts are offered for early payment, i.e. terms are net 30.

Required:
1. Prepare the entries required to record total sales for the company's first year of operations, i.e. as if all sales occurred at one time.
2. Prepare the entries required to record total [actual] sales returns that occurred during the first year of operations, i.e. as of all sales returns occurred at one time.
3. Prepare the entries required to record the year-end adjustments for estimated sales returns. Assume that cash has not yet been collected for merchandise that could yet be returned.

Answer 1

General Journal

No	Account Title and Explanation	Debit	Credit
1.	Accounts Receivable	$400,000
	Sales Revenue		$400,000
	Cost of Goods Sold	$220,000
	Inventory($400,000×55%)		$220,000
2	Sales Return	$30,000
	Accounts Receivable		$30,000
	Inventory (30,000 ×55%)	$16,500
	Cost of Goods Sold		$16,500
3	Sales Return	$10,000
	Allowance for Sales Return		$10,000
	Inventory - Estimated Return	$5,500
	Cost of Goods Sold (10,000 ×55%)		$5,500