PrimeTech sold $4,000,000 of merchandise on account during the current year. The

Question

PrimeTech sold $4,000,000 of merchandise on account during the current year. The cost for this merchandise to PrimeTech was $1,200,000. To encourage early payment from its customers, PrimeTech offers credit terms of 2/10, n/30. At year-end, PrimeTech recognizes that there are $400,000 of sales on account still eligible for the 2 percent discount. PrimeTech believes that all customers will pay within the discount period to receive this discount. In addition, PrimeTech allows a 60-day return privilege for the merchandise it sells. At year-end, PrimeTech estimates there remain $900,000 of sales (with a cost to PrimeTech of $270,000) that are still within the 60-day return period and that, based on past experience, 7 percent of this merchandise is expected to be returned.

Prepare the period-end adjusting journal entries needed for PrimeTech to comply with the new revenue recognition standard. Assume PrimeTech’s fiscal year-end is December 31.

My 6 multiple choice options that need to be corrctly placed in the description (to the left of the debit and credit boxes) are: Allowance for sales discounts, Cost of goods sold, Estimated inventory return, Sales discounts, Sales refunds payable, Sales returns and allowances.

Explanation / Answer

Particulars Debit Credit Profit & loss A/c    $80,000.00 Allowance for sales discount $80,000.00 (being 2% provision made for the sales discount at year end) Sales Returns and Allowances   $63,000.00 Accounts Receivable $63,000.00 (Sales Returns recorded) Inventory – Right of Return $18,900.00 Cost of Sales on Estimated Returns $18,900.00 (being provision for sales return made)

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