On July 10, 2014, 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 deliv- ery. Past experience indicates that the normal return rate is 15%. By October 11, 2014, 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, 2014, and (b) $78,000 of returns on October 11, 2014.
Answer
(a) Prepare journal entry to record the sales and estimated returns at 7/10/2014
| Description | Debit $ | Credit $ |
| Accounts Receivable | 700000 | |
| Refund Liability (700K x .15) | 105000 | |
| Sales Revenue | 595000 | |
| Cost of Goods Sold | 476000 | |
| Estimated Inventory Returns | 84000 | |
| Inventory | 560000 |
Prepare journal entry to record the returns during 2014
| Description | Debit $ | Credit $ |
| Refund Liability | 78000 | |
| Accounts Receivable | 78000 | |
| Returned Inventory | 62400 | |
| Estimated Inventory Return | 62400 |
