Chapter 5, Problem 20E

Exercise 5-20

Recording estimates of future returns

P6

Chico Company allows its customers to return merchandise within 30 days of purchase. At December 31, 2017, the end of its first year of operations, Chico estimates future-period merchandise returns of $60,000 (cost of $22,500) related to its 2017 sales.

. On January 3, 2018, a customer returns merchandise with a selling price of $2,000 for a cash refund; the returned merchandise cost $750 and is returned to inventory as it is not defective.

a. Prepare the December 31, 2017, year-end adjusting journal entry for estimated future sales returns and allowances (revenue side).

b. Prepare the December 31, 2017, year-end adjusting journal entry for estimated future inventory returns and allowances (cost side).

c. Prepare the January 3, 2018, journal entry(ies) to record the merchandise returned.