JED Company started business in March 2014. Sales for its first year were $600,0
ID: 2476576 • Letter: J
Question
JED Company started business in March 2014. Sales for its first year were $600,000. JED priced its merchandise to yield a 35% gross profit based on sales dollars. Industry statistics suggest that 8% of the merchandise sold to customers will be returned. Beethoven estimated its sales returns based on the industry average. During the year, customers returned $25,000 in sales. Beethoven uses a perpetual inventory system.
Required:
Prepare summary journal entries to record (1) sales, (2) sales returns, and (3) the year-end adjusting entry for estimated sales returns.
Explanation / Answer
The question is not very precise whether the estimate made earlier and excess estimate to be reversed at the year end. Assuming so and calculating accordingly Details Amt $ Sales in Year 600,000 Gross Profit @35% on sales 210,000 Cost Of Goods sold= 390,000 Estimated return @8% of sales = 48,000 Actual return so far 25,000 Additional return liability to be reversed 23,000 Accounting Entries Account Title Dr $ Cr $ Sales Revenue 600,000 Accounts Receivable 600,000 (recording sales) Finished Goods Inventory 390,000 Cost Of Goods sold 390,000 ( recording inventory costs) Sales Return & Allowances 48,000 Accounts Receivable 48,000 ( provision for return @8% of sales) Inventory -Right to Return 31,200 Cost of sales on Estimated returns 31,200 ( inventory cost of estimated return) Sales Return & Allowances 23,000 Accounts Receivable 23,000 (adjustment entry to reduce excess provision) Inventory -Right to Return 14,950 Cost of sales on Estimated returns 14,950 ( adjustment of inventory cost of excess return provision)
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