Question

Pronghorn Publishing Co. publishes college textbooks that are sold to bookstores on the following terms. Each title has a fixed wholesale price, terms f.o.b. shipping point, and payment is due 60 days after shipment. The retailer may return a maximum of 30% of an order at the retailer’s expense. Sales are made only to retailers who have good credit ratings. Past experience indicates that the normal return rate is 12%. The costs of recovery are expected to be immaterial, and the textbooks are expected to be resold at a profit.

On July 1, 2017, Pronghorn shipped books invoiced at $15,400,000 (cost $10,780,000). Prepare the journal entry to record this transaction

On October 3, 2017, $1,540,000 of the invoiced July sales were returned according to the return policy, and the remaining $13,860,000 was paid. Prepare the journal entries for the return and payment

Assume Pronghorn prepares financial statements on October 31, 2017, the close of the fiscal year. No other returns are anticipated. Indicate the amounts reported on the income statement and balance related to the above transactions. Income Statement (partial) Balance Sheet (partial)

Answer 1

Date	Accounts Titles & Explanation	Debit	Credit
July 1, 2017	Accounts Receivable	$15,400,000
	Sales Revenue -Texts		$15,400,000
	($20,000 × 12% × 2/12)
	(To recognize revenue)
July 1, 2017	Sales Returns* ($15,400,000 X 12%)	$1,848,000
	Allowance for Sales Returns		$1,848,000
	(To record expected returns)
Oct 03, 2017	Allowance for Sales Returns	$1,848,000
	Sales Returns		$308,000
	Accounts Receivable		$1,540,000
	(To record returns)
Oct 03, 2017	Cash	$13,860,000
	Accounts Receivable		$13,860,000
	(To record the payment)
In Income Statement (Partial)
	Sales Revenue -Texts	$15,400,000
	Less:Sales Return	$1,540,000
	Net Sales		$13,860,000
In Balance Sheet (partial)
	Current Assets
	Cash	$13,860,000