Question

Use the data for Valley Company in Problem 4-3A to complete the following requirements.

Required

1. Prepare closing entries as of August 31, 2017 (the perpetual inventory system is used).

Analysis Component

2. In prior years, the company experienced a 4% returns and allowance rate on its sales, which means approximately 4% of its gross sales were eventually returned outright or caused the company to grant allowances to customers. Compute the ratio of sales returns and allowances divided by gross sales. How does this year’s ratio compare to the 4% ratio in prior years?

Short answer

1. Both sides of the journal totals to$451,200.
2. Sales return percentage:5.32%.

Step-by-step solution

Step-by-Step SolutionStep 1: Definition of Closing Entries

The journal entries prepared for transferring the balance in the temporary accounts to a permanent account known as retained earnings are known as closing entries.

Closing Entries

Date	Accounts and Explanation	Debit $	Credit $
31 Aug 2017	Sales	$225,600
	Income summary		$225,600
31 Aug 2017	Income summary	175,750
	Sales discount		2,250
	Sales return and allowances		12,000
	Cost of goods sold		74,500
	Sales salaries expenses		32,000
	Rent expenses – selling space		8,000
	Store supplies expenses		1,500
	Advertising expenses		13,000
	Office salaries expenses		28,500
	Rent expenses – office space		3,600
	Office supplies expenses		400
31 Aug 2017	Income summary	49,850
	Retained earnings		49,850
		$451,200	$451,200

Sales return percentage

$\begin{array}{rcl}Salesreturnratio& =& \frac{Salesreturnandallowances}{Grosssales}\times 100\\ & =& \frac{\$12,000}{\$225,600}\times 100\\ & =& 5.32\%\end{array}$

The current year’s sales return is 5.32% of gross sales. It reflects that returns from the customer have increased as compared to the previous year.