Question

Credit Sales with right of return

During April 2020, Hobart Ltd sold 200 products on credit for $50 each. Customers may receive a full refund for any unused products returned within 30 days of sale. Each product costs $40. Based on past experience, Hobart Ltd estimates that 2 of the products will be returned during May. The cost of recovering the products will be immetarial and returned products can be resold at a profit.

Required

a	Calculate the amount of revenue recognised by Hobart Ltd in April.
b	Assume that transactions occur in accordance with expectations. Prepare all journal entries to record the return of products during May.

Answer 1

a. Calculate the amount or revenue to be recongnised in April

Particular
Sale (Unit)	200
Price p.u	$50
Total Revenue	$10,000

The return of 2 product will be booked as provision and should not be reduced from total revenue.

Revenue to be booked will $10,000

After Sales Return, the revenue will be revised to $9,900

b. Journal Entries

1. Credit Sale
Party A/c Dr	$10,000
To Sales A/c		$10,000

2. Return of goods
Sales return A/c Dr	$100
To Part A/c		$100