Chico Company allows its customers to return merchandise within 30 days of purchase.
• At December 31, 2016, the end of its first year of operations, Chico estimates future period merchandise returns of $60,000 (cost of $22,500) related to its 2016 sales.
• On January 3, 2017, a customer returns merchandise with a selling price of $2,000 for a cash refund; the returned merchandise cost $750 and is returned to inventory as it is not defective.
a. Prepare the December 31, 2016, year-end adjusting journal entry for estimated future sales returns and allowances (revenue side).
b. Prepare the December 31, 2016, year-end adjusting journal entry for estimated future inventory returns and allowances (cost side).
c. Prepare the January 3, 2017, journal entry(ies) to record the merchandise returned.