Question

On July 10, 2017, Amodt Music sold CDs to retailers on account and recorded sales revenue of \(700,000 (cost \)560,000). Amodt grants the right to return CDs that do not sell in 3 months following delivery. Past experience indicates that the normal return rate is 15%. By October 11, 2017, retailers returned CDs to Amodt and were granted credit of \(78,000. Prepare Amodt’s journal entries to record (a) the sale on July 10, 2017, and (b) \)78,000 of returns on October 11, 2017, and on October 31, 2017. Assume that Amodt prepares financial statement on October 31, 2017.

Short answer

No Entry on 31^st October 2017

Step-by-step solution

Right to Return

A customer'sright of return frequently allows them to a full or partial refund of their purchase price, as well as a credit for future purchases. Under the new standard, a right of return is not a distinct performance requirement, but it does have an impact on the transaction price predicted for transferred products.

Journal entries

Date	Particulars	Debit ($)	Credit ($)
July 10, 2017	Account receivable a/c	700,000
	Sales revenue a/c		700,000
July 10, 2017	Cost of goods sold a/c	560,000
	Inventory a/c		560,000
October 11, 2017	Sale return and allowance a/c	78,000
	Account receivable a/c		78,000
October 11, 2017	Inventory Return a/c	62,400
	Cost of goods sold		62,400

Calculation of Cost of Goods Sold return is as follows:

$\begin{array}{rcl}\mathrm{Return}\mathrm{cost}\mathrm{of}\mathrm{goods}\mathrm{sold}& =& \frac{\mathrm{COGS}\hspace{0.17em}\mathrm{Sold}}{\mathrm{Sales}\mathrm{revenue}}\times \mathrm{Value}\mathrm{of}\mathrm{sales}\mathrm{revenue}\mathrm{return}\\ & =& \frac{\$560,000}{\$700,000}\times 78,000\\ & =& \$62,400\end{array}$

Note: No entry is required for October 31, 2017.