Question

Adjusting entry for customer refunds, allowances, and returns

Statz Company had sales of $1,800,000 and related cost of goods sold of $1,150,000 for its first year of operations ending December 31. Statz provides customers a refund for any returned or damaged merchandise. At the end of the year, Statz estimates that customers will request refunds for 1.5% of sales and estimates that merchandise costing $16,000 will be returned. Assume that on February 3 of the following year, Buck Co. returned merchandise with a selling price of $5,000 for a cash refund. The returned merchandise originally cost Statz $3,100.

a. Journalize the adjusting entries on December 31 to record the expected customer returns.

Dec. 31	Sales Accounts Payable Accounts Receivable Cash Merchandise Inventory Miscellaneous Expense Purchases Purchases Discounts Purchases Returns and Allowances Sales
	Customer Refunds Payable Accounts Payable Accounts Receivable Customer Refunds Payable Merchandise Inventory Miscellaneous Expense Purchases Purchases Discounts Purchases Returns and Allowances Sales
	Estimated Returns Inventory Accounts Payable Accounts Receivable Cash Cost of Goods Sold Estimated Returns Inventory Miscellaneous Expense Purchases Purchases Discounts Purchases Returns and Allowances
	Cost of Goods Sold Accounts Payable Accounts Receivable Cash Cost of Goods Sold Estimated Returns Inventory Miscellaneous Expense Purchases Purchases Discounts Purchases Returns and Allowances

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b. Journalize the entries to record the returned merchandise and cash refund to Buck Co. on February 3.

Feb. 3	Customer Refunds Payable Accounts Payable Cash Customer Refunds Payable Merchandise Inventory Miscellaneous Expense Purchases Purchases Discounts Purchases Returns and Allowances Sales
	Cash Accounts Payable Cash Customer Refunds Payable Merchandise Inventory Miscellaneous Expense Purchases Purchases Discounts Purchases Returns and Allowances Sales
	Inventory Accounts Payable Accounts Receivable Cash Cost of Goods Sold Estimated Returns Inventory Inventory Purchases Purchases Discounts Purchases Returns and Allowances
	Estimated Returns Inventory Accounts Payable Accounts Receivable Cash Cost of Goods Sold Estimated Returns Inventory Inventory Purchases Purchases Discounts Purchases Returns and Allowances

Answer 1

Date	Account Titles and Explanation	Debit	Credit
Dec. 31	Sales	27000
	Customer Refunds Payable (1.5% x $1800000)		27000
	(To record estimated sales returns)
	Estimated Returns Inventory	16000
	Cost of goods sold		16000
	(To record cost of estimated sales returns)
Feb. 3	Customer Refunds Payable	5000
	Cash		5000
	(To record cash refund)
	Inventory	3100
	Estimated Returns Inventory		3100
	(To record inventory returned)