Question

Organic Growth Company is presently testing a number of new agricultural seeds that it has recently harvested. To stimulate interest, it has decided to grant to five of its largest customers the unconditional right of return to these products if not fully satisfied. The right of return extends for 4 months. Organic Growth estimates returns of 20%. Organic Growth sells these seeds on account for \(1,500,000 (cost \)750,000) on January 2, 2017. Customers are required to pay the full amount due by March 15, 2017.

Instructions

(a) Prepare the journal entry for Organic Growth at January 2, 2017.

(b) Assume that one customer returns the seeds on March 1, 2017, due to unsatisfactory performance. Prepare the journal entry to record this transaction, assuming this customer purchased \(100,000 of seeds from Organic Growth.

(c) Assume Organic Growth prepares financial statements quarterly. Prepare the necessary entries (if any) to adjust Organic Growth’s financial results for the above transactions on March 31, 2017, assuming remaining expected returns of \)200,000.

Short answer

(a) Sales revenue = $1,500,000

(b) Cash received = $1,400,000

(c) Sales return = $200,000

Step-by-step solution

Meaning of Sales Returns

A buyer returns products to the seller because either the amount of the goods was more than required or it was damaged, which subsequently helps to reduce the payment amount for the buyer.

Journal entries for Organic Growth in 2017

(a)

Date	Particular	Debit ($)	Credit ($)
January 2, 2017	Accounts receivable a/c Dr.	1,500,000
	To Sales revenue a/c		1,500,000
January 2, 2017	Cost of goods sold a/c Dr.	750,000
	To Inventory a/c		750,000

(b)

Date	Particular	Debit ($)	Credit ($)
March 1, 2017	Sales returns and allowances a/c Dr.	100,000
	To Accounts receivable a/c		100,000
March 1, 2017	Returned inventory a/c Dr.	50,000
	To Cost of goods sold a/c		50,000
March 15, 2017	Cash a/c Dr.	1,400,000
	To Accounts receivables a/c		1,400,000

(c)

Date	Particular	Debit ($)	Credit ($)
March 1, 2017	Sales returns and allowances a/c Dr.	200,000
	To Allowances for sales returns and allowances a/c		200,000
March 1, 2017	Estimated inventory returns a/c Dr.	100,000
	To Cost of goods sold a/c		100,000

Working Notes:

$\begin{array}{rcl}\mathrm{Returned}\mathrm{inventory}& =& \frac{\mathrm{Inventory}}{\mathrm{Sales}\mathrm{revenue}}\times \mathrm{Sales}\mathrm{return}\\ & =& \frac{\$750,000}{\$1,500,000}\times \$100,000\\ & =& \$50,000\\ \mathrm{Cash}& =& \mathrm{Sales}\mathrm{revenue}-\mathrm{Sales}\mathrm{return}\\ & =& \$1,500,000-\$100,000\\ & =& \$1,400,000\end{array}$