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Towbin Products sells merchandise on credit for $7,000 on December 1, 2016. Towbin estimates that returns and allowances will amount to 4% of sales. On December 22, 2016, a customer returns for credit merchandise originally sold on December 1 for $200.

	Required:
1.	Prepare the journal entries to record the preceding sale and the return of merchandise.
2.	How would the preceding information be reflected on Towbins December 31, 2016, financial statements?
3.	Next Level What is the conceptual advantage of recording sales returns and allowances as a reduction of revenue?

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Chart of Accounts

CHART OF ACCOUNTS
Towbin Products
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 141 Inventory 152 Prepaid Insurance 181 Equipment 198 Accumulated Depreciation LIABILITIES 211 Accounts Payable 226 Return Liability 231 Salaries Payable 250 Unearned Revenue 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings	REVENUE 411 Sales Revenue EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 541 Depreciation Expense 559 Miscellaneous Expenses 910 Income Tax Expense

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General Journal

Prepare the journal entries to record the sale and the return of merchandise.

PAGE 10

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5

Solution

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5

Points:

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Explanation

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Analysis

How would the information be reflected on Towbins December 31, 2016, financial statements?

Accounts Receivable is reported as a selector 1

current asset

noncurrent asset

on the balance sheet and the companys obligation for future returns, otherwise called selector 2

Allowance for doubtful accounts

Return liability

Sales return and allowances

is included in selector 3

contra assets

current liabilities

noncurrent liabilities

on the balance sheet. Sales of this nature are reported selector 4

on the income statement

on the balance sheet

in the notes to the financial statements

.

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Explanation

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Next Level

What is the conceptual advantage of recording sales returns and allowances as a reduction of revenue?

Recording the return and allowance in the period of the sale avoids selector 1

inflating

understating

sales revenue for sales that management expects will be reversed in the future.

Points:

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