In its income statement for the first quarter of fiscal year 2018, The Gap, Inc., reported net sales of $3,783 million and cost of goods sold and occupancy expenses of $2,356 million, resulting in a gross profit of $1,427 million. In its footnotes, The Gap reports that "We also record an allowance for estimated returns based on our historical return patterns and various other assumptions that management believes to be reasonable, which are presented on a gross basis on our Condensed Consolidated Balance Sheet."

When The Gap accounts for estimated sales returns, it makes two entries. First, it reduces sales revenue by the returns' expected sales price and recognizes a sales return allowance as a liability for the same amount. Then, The Gap reduces cost of goods sold by the returns' expected cost and recognizes a right of return merchandise asset for that same amount.

At the end of the first quarter of fiscal year 2018, The Gap reported a sales return allowance liability of $93 million and a right of return merchandise asset of $38 million.

REQUIRED:

a. What was the estimated gross profit margin on the items The Gap expected to be returned following the first quarter of fiscal year 2018? How does that compare with the gross profit margin reported in the income statement for the first quarter of fiscal year 2018? What might account for the difference?

b. Suppose The Gap sells 100 units of an item for $50 each, and its gross profit on each unit is $20. Further, suppose The Gap expects that 10 of the units will be returned. What entries will be made to record the sale of 100 units (for cash) and the expected returns? What entry is made when ten customers subsequently return the items and receive a cash refund? Assume that the units are undamaged and can be sold to other customers.