On June 3, 2014, Hunt Company sold to Ann Mount merchandise having a sales price

Question

On June 3, 2014, Hunt Company sold to Ann Mount merchandise having a sales price of $8,240 (cost $5,768) with terms of 2/10, n/60, f.o.b. shipping point. Hunt estimates that merchandise with a sales value of $824 will be returned. An invoice totaling $124, terms n/30, was received by Mount on June 8 from Olympic Transport Service for the freight cost. Upon receipt of the goods, on June 5, Mount notified Hunt that $309 of merchandise contained flaws. The same day, Hunt issued a credit memo covering the defective merchandise and asked that it be returned at Hunt’s expense. Hunt estimates the returned items to have a fair value of $124. The freight on the returned merchandise was $25, paid by Hunt on June 7. On June 12, the company received a check for the balance due from Mount.

Prepare journal entries for Hunt Company to record all the events noted above assuming sales and receivables are entered at gross selling price. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.)

I THINK I've created the correct account titles but need help!

Explanation / Answer

The journal entries are as follows:

___________

Notes :

1) Since, the estimated returns are $824 for a total sales value of $8,240. It means that Hunt is expecting 10% (824/8,240*100) of the merchandize to be returned. We will use this 10% to calculate the cost of estimated returns and adjust the cost of goods sold as shown in the cost of goods sold journal entry on June 3, 2014.

2) On the receipt of inventory back from the customer, we will increase the inventory balance with the fair value of returned inventory.

3) Since, goods worth $309 have been returned by the customer within the discount period of 10 days, Ann Mount merchandise will be entitled to get a discount of 2% on the balance amount payable which is $7,931 (8,240 - 309). The amount of discount would be $158.62 or $159.

Date Account Titles and Explanation Debit Credit June 3, 2014 Accounts Receivables $8,240 Sales Revenue (8,240 – 824) $7,416 Refund Liability (Customer Refunds Payable) $824 (To record sale) Cost of Goods Sold $5,191 Estimated Inventory Returns (10%*5,768) $577 Inventory $5,768 (To record cost of goods sold) June 5, 2014 Refund Liability (Customer Refunds Payable) $309 Accounts Receivables $309 (To record refund liability) Inventory $124 Estimated Inventory Returns $124 (To record Estimated Inventory Returns) June 7, 2014 Transportation-Out $25 Cash $25 (To record delivery cost) June 12, 2014 Cash (7,931 - 159) $7,772 Sales Discounts (7931*2%) $159 Accounts Receivables $7,931 (To record payment)

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