Question

Use the data for Barkley Company in Problem 4-3B to complete the following requirements.

Required

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

Analysis Component

2. In prior years, the company experienced a 5% returns and allowance rate on its sales, which means approximately 5% 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 5% ratio in prior years?

Short answer

Answer

1. Both sides of the journal totals$665,300.
2. Sales return percentage is6.01%.

Step-by-step solution

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

Closing entries, also known as retained earnings, are journal entries prepared for transferring the balance of temporary accounts to permanent accounts.

Closing Entries

Date	Accounts and Explanation	Debit $	Credit $
31 Aug 2017	Sales	$332,650
	Income summary		$332,650
31 Aug 2017	Income summary	277,475
	Sales discount		5,875
	Sales return and allowances		20,000
	Cost of goods sold		115,600
	Sales salaries expenses		44,500
	Rent expenses – selling space		16,000
	Store supplies expenses		3,850
	Advertising expenses		26,000
	Office salaries expenses		40,750
	Rent expenses – office space		3,800
	Office supplies expenses		1,100
31 Aug 2017	Income summary	55,175
	Retained earnings		55,175
		$665,300	$665,300

Sales return percentage

$\begin{array}{c}\text{Sales return ratio=}\frac{\text{Sales return and allowances}}{\text{Gross sales}}\text{×100}\\ \text{=}\frac{\text{\$20,000}}{\text{\$332,650}}\text{×100}\\ \text{=6.01\%}\end{array}$

The sales return percentage of the previous year reflects a good position than the current year because the sales return percentage of the previous year is less than the current year.