Regarding the end of period adjusting entries to record estimated sales returns,which of the following statements is correct? (Assume the perpetual inventory system is used.)
A) Companies use data published by the FASB to estimate the amount of sales returns related to the sales of similar companies.
B) It is acceptable to prepare a single adjusting entry which debits Estimated Returns Inventory and credits Refunds Payable.
C) Both Sales Revenue and Cost of Goods Sold accounts are decreased.
D) Estimated Returns Inventory is an income statement account.

Question

Quizplus · Accepted Answer

When recording estimated sales returns, both Sales Revenue and Cost of Goods Sold accounts are decreased. This is because sales returns represent a reversal of a sale, which means that both the revenue and cost associated with that sale must be reversed. The estimated returns are recorded using a contra-revenue account called Estimated Returns Inventory, which is a balance sheet account and not an income statement account. It is not acceptable to prepare a single adjusting entry that only debits Estimated Returns Inventory and credits Refunds Payable because this does not accurately reflect the impact on revenue and cost of goods sold. Companies typically do not use data published by the FASB to estimate sales returns, but rather use their own historical data or industry benchmarks.

Regarding the End of Period Adjusting Entries to Record Estimated