Question

Problem 1

An entity subject to IFRS provides its customers with a right of return within a 4 week
period after the purchase date. The entity estimates that, on average, 3% of sales will be
returned. The sales for the month of December 31, 20x4 were $2,800,000 and a total of
$65,000 of sales made during December 20x4 were returned by the end of December.
The average gross margin is 45%.

Required –
Prepare the year-end adjusting entry.

Answer 1

Sales for the month of December $2,800,000

Estiamted sales returns under right to return (3% of sales ) $84,000

Actual returns during December $65,000

Balance to be provided $19,000

Cost of these returns (55% = 100 - 45%) $10,450

The following journal entries will be recorded.

Date	Account Title	Debit	Credit
Dec.31, 20X4	Sales Returns and Allowances	19000
	Accounts Receivable		19000
	(Providing for the right to return)
Dec.31, 20X4	Inventory - Right to return	10450
	Cost of goods sold - right to return		10450
	(Cost of the goods under right to return)