(Sales with Returns) On March 10, 2017, Steele Company sold to Barr Hardware 200 tool sets at a price of \(50 each (cost \)30 per set) with terms of n/60, f.o.b. shipping point. Steele allows Barr to return any unused tool sets within 60 days of purchase. Steele estimates that (1) 10 sets will be returned, (2) the cost of recovering the products will be immaterial, and (3) the returned tools sets can be resold at a profit. On March 25, 2017, Barr returned six tool sets and received a credit to its account.

Instructions

(a) Prepare journal entries for Steele to record (1) the sale on March 10, 2017, (2) the return on March 25, 2017, and (c) any adjusting entries required on March 31, 2017 (when Steele prepares financial statements). Steele believes the original estimate of returns is correct.

(b) Indicate the income statement and balance sheet reporting by Steele at March 31, 2017, of the information related to the Barr sales transaction.

Step by step solution

01

Meaning of Income Statement

A business report that provides detailed information for revenue and expenses incurred by a company in the course of its normal operations is known as an income statement.

02

Journal entries for Steele

Date	Particular	Debit ($)	Credit ($)
March 10, 2017	Accounts receivables a/c	10,000
	Sales revenue a/c		10,000
March 10, 2017	Cost of goods sold a/c	6,000
	Inventory a/c		6,000
March 25, 2017	Sales return a/c	500
	Accounts receivables a/c		500
March 31, 2017	Returned inventory a/c	300
	Cost of goods sold a/c		300

Working Notes:

The price of each toolset is $50

The cost of each toolset is $30

Toolsets sold = 200

Toolsets returned = 10

$$\begin{gathered} \mathrm{Accounts}\mathrm{receivables}=\mathrm{No}.\mathrm{of}\mathrm{toolsets}\mathrm{sold}\times \mathrm{Price}\mathrm{of}\mathrm{each}\mathrm{toolset} \\ =200\times \$50 \\ =\$10,000 \end{gathered}$$

$$\begin{gathered} \mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}=\mathrm{no}.\mathrm{of}\mathrm{toolsets}\mathrm{sold}\times \mathrm{Cost}\mathrm{of}\mathrm{each}\mathrm{toolset} \\ =200\times \$30 \\ =\$6,000 \end{gathered}$$

$$\begin{gathered} \mathrm{Sales}\mathrm{return}=\mathrm{No}.\mathrm{of}\mathrm{toolsets}\mathrm{returned}\times \mathrm{Price}\mathrm{of}\mathrm{each}\mathrm{toolset} \\ =10\times \$50 \\ =\$500 \end{gathered}$$

$$\begin{gathered} \mathrm{Returned}\mathrm{inventory}=\mathrm{No}.\mathrm{of}\mathrm{toolsets}\mathrm{returned}\times \mathrm{Cost}\mathrm{of}\mathrm{each}\mathrm{toolset} \\ =10\times \$30 \\ =\$300 \end{gathered}$$

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