Question

On July 10, 2020, Carla Music sold CDs to retailers on account and recorded sales revenue of $686,000 (cost $528,220). Carla 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, 2020, retailers returned CDs to Carla and were granted credit of $75,900. Prepare Carla’s journal entries to record (a) the sale on July 10, 2020, and (b) $75,900 of returns on October 11, 2020, and on October 31, 2020. Assume that Carla prepares financial statement on October 31, 2020.

Answer 1

Answer:

account receivable   686,000 debit

           sales revenue         686,000 credit

--to record the sale--

Cost of goods sold    528,220 debit

        Inventory                    528,220 credit

--to record cost of goods sold--

warrant expense    102,900 debit

warrant liablity              102,900 credit

--to record expected returns--

warrant liability 75,000 debit

    account receivable     75,000 credit

--to record actual returns--

Explanation:

The sale of the CDs will be recorded like a common sale, but we will also stablish a warrant liability for returns:

This is done to match the expense of the returned CD's to the period of the sales which generated this returns:

warrant liablity 15% of 686,000 = 102,900

then, when actual returns ocurs: we will decrease the account receivable of the customer.