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Chapter 18: 13BE (page 1033)

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

Expert verified

No Entry on 31st October 2017

Step by step solution

01

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.

02

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:

Returncostofgoodssold=COGS SoldSalesrevenue×Valueofsalesrevenuereturn=$560,000$700,000×78,000=$62,400

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

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