Question

During 2021, its first year of operations, Ashbaugh Industries recorded sales of $21,000,000 and experienced returns of $1,400,000. Returns are accounted for as they occur, with additional estimated returns accrued at the end of the period. Cost of goods sold totaled $12,600,000,000 (60% of sales). The company estimates that 8% of all sales will be returned. The year-end adjusting journal entry to account for anticipated sales returns would include a:
A) Credit to sales returns of $280,000.
B) Credit to refund liability of $280,000.
C) Debit to sales returns of $1,680,000.
D) Debit to cost of sales of $168,000.

Answer 1

Answer:

B) Credit to refund liability of $280,000

Explanation:

The total estimated returns are 85 of the total sales = 8% x $21,000,000 = $1,680,000.

Since the company had already accounted for $1,400,000 in returns, the adjusted necessary should be = total returns - accounted returns = $1,680,000 - $1,400,000 = $280,000

Since the refund liability account must increase, and it is a liability account, it should be credited.