Wellington Company had sales this year of $2,180,000 and cost of goods sold of $1,050,000. Wellington expects returns and allowances in the following year to equal 6% of sales, half being returns of goods and half allowances for merchandise kept by the buyer. The adjusting entry or entries to record the expected sales returns is(are):

Question

Quizplus · Accepted Answer

The adjusting entry to record the expected sales returns is to estimate and record the returns and allowances for sales made in the current year that will be returned in the next year. The journal entry is to debit Sales Returns and Allowances and credit a contra revenue account such as Sales Returns and Allowances Payable. 
In this case, the expected returns and allowances are 6% of sales, and half of them are returns of goods and half allowances for merchandise kept by the buyer. Therefore, the entry should be:
Debit: Sales Returns and Allowances $65,400 ([$2,180,000 x 6%] x 50%)
Credit: Sales Returns and Allowances Payable $32,700 ([$2,180,000 x 6%] x 50%)
Hence, option B is the correct answer.

Wellington Company Had Sales This Year of $2,180,000 and Cost