Question

Hahn Flooring Company uses a perpetual inventory system. Journalize the December 31 adjusting entries based upon the following:
A. Sales returns of $125,000 and merchandise returns of $80,000 are estimated for the current year's sales.
B. The inventory account has a balance of $1,333,150, while physical inventory indicates that $1,309,900 of merchandise is on hand.
Journalize the December 31 adjusting entries based on the above transactions. Assume that the inventory shrinkage is a normal amount.

Answer 1

Answer:

Date         Accounts titles                                    Debit          Credit

A)

Dec. 31    Sales returns and allowances            $125,000

               Accounts receivable                                                 $125,000

               Merchandise Inventory                        $80,000

               Cost of Good sold                                                      $80,000

B)

Dec. 31     Cost of Good sold                                $23,250  

                 Merchandise Inventory                                             $23,250

Note: Inventory Shrinkage = Account balance of inventory - Physical inventory on hand

= $1,333,150 - $1,309,900

= $23,250

Answer 2

Answer:

A.  DR Sales and CR Customer Refunds Payable

    DR Estimated Returns Inventory CR COGS

B.  DR COGS CR Inventory

Explanation:

A.  At the end of an accounting period, sellers are required to estimate returns and allowances. Two entries are required. The first reduces Sales account and increases a Customer Refunds Payable account for the estimated returns and allowances to be given to customers in the future. The second creates an Estimated Returns Inventory account and reduces the Cost of Goods Sold account for the cost of the merchandise expected to be returned.

B.  Inventory shrinkage is recorded by decreasing merchandise inventory and increasing cost of merchandise sold for the difference between the perpetual inventory records and the inventory on hand.