Question

Chico Company allows its customers to return merchandise within 30 days of purchase.

• At December 31, 2017, the end of its first year of operations, Chico estimates future-period merchandise returns of \(60,000 (cost of \)22,500) related to its 2017 sales.
• On January 3, 2018, a customer returns merchandise with a selling price of \(2,000 for a cash refund; the returned merchandise cost \)750 and is returned to inventory as it is not defective.

a. Prepare the December 31, 2017, year-end adjusting journal entry for estimated future sales returns and allowances (revenue side).

b. Prepare the December 31, 2017, year-end adjusting journal entry for estimated future inventory returns and allowances (cost side).

c. Prepare January 3, 2018, journal entry(ies) to record the merchandise returned.

Short answer

1. In this journal entry, allowance for sales return is debited, and sales refund payable is credited.
2. In this journal, the allowance for inventory return is increased through debit, and the cost of goods sold is reduced through credit.
3. Two journal entries will be made for actual returns made by the customer. One is for cash paid in respect of return, and the other is for reducing the cost of goods sold and increasing the merchandise inventory.

Step-by-step solution

Step-by-Step SolutionStep 1: Definition of Sales Discount

The factor that reduces the selling price of a product is known as a sales discount. It reduces the selling price and revenue of the business entity and therefore, it is considered a contra-revenue account.

Adjusting journal entry for future sales returns

Date	Accounts and Explanation	Debit $	Credit $
31 Dec 2017	Sales return and allowance	$60,000
	Sales refund payable		$60,000

Adjusting journal entry for future inventory returns

Date	Accounts and Explanation	Debit $	Credit $
31 Dec 2017	Inventory return estimated	$22,500
	Cost of goods sold		$22,500

Journal entries to record merchandise returned

Date	Accounts and Explanation	Debit $	Credit $
3 Jan 2018	Sales return and allowances	2,000
	Cash		2,000
3 Jan 2018	Merchandise inventory	750
	Cost of goods sold		750