During 2024, its first year of operations, Hollis Industries recorded sales of $12,300,000 and experienced returns of $790,000. Cost of goods sold totaled $7,380,000 (60% of sales). The company estimates that 8% of all sales will be returned.
Prepare the year-end adjusting journal entries to account for anticipated sales returns, assuming that all sales are made on credit and all accounts receivable are outstanding.
Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field.
Journal entry worksheet
Record the anticipated sales returns.
Note: Enter debits before credits.
Answer (1)
To account for anticipated sales returns at year-end, Hollis Industries needs to record an adjusting journal entry. This ensures that the company's financial statements accurately reflect potential future returns.
Step 1: Calculate the Estimated Sales Returns
The company estimates that 8% of total sales will be returned.
Total sales = $12,300,000
Estimated return rate = 8%
Estimated Returns = Total Sales × Estimated Return Rate = 12 , 300 , 000 × 0.08 = 984 , 000
Step 2: Determine the Necessary Adjustment
The actual returns already recorded are $790,000. To adjust for the estimated returns, we need to account for the difference between the estimated returns and the actual returns.
Adjustment Needed = Estimated Returns − Actual Returns = 984 , 000 − 790 , 000 = 194 , 000
Step 3: Record the Journal Entry
The adjusting journal entry will involve:
Debiting "Sales Returns and Allowances" to increase the account, reflecting higher expected returns.
Crediting "Allowance for Sales Returns" as a liability account to provide for the anticipated returns.
Journal Entry:
Debit: Sales Returns and Allowances $194,000
Credit: Allowance for Sales Returns $194,000
By making this entry, Hollis Industries recognizes the potential sales returns as part of their year-end financial reporting, maintaining accurate and prudent financial management.
