Towbin Products sells merchandise on credit for $7,000 on December 1, 2016. Towbin estimates that returns and allowances will amount to 4% of sales. On December 22, 2016, a customer returns for credit merchandise originally sold on December 1 for $200.

	Required:
1.	Prepare the journal entries to record the preceding sale and the return of merchandise.
2.	How would the preceding information be reflected on Towbins December 31, 2016, financial statements?
3.	Next Level What is the conceptual advantage of recording sales returns and allowances as a reduction of revenue?

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Chart of Accounts

CHART OF ACCOUNTS

Towbin Products

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
141	Inventory
152	Prepaid Insurance
181	Equipment
198	Accumulated Depreciation

	LIABILITIES
211	Accounts Payable
226	Return Liability
231	Salaries Payable
250	Unearned Revenue
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
910	Income Tax Expense

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General Journal

Prepare the journal entries to record the sale and the return of merchandise.

PAGE 10

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5

Solution

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5

Points:

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Explanation

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Analysis

How would the information be reflected on Towbins December 31, 2016, financial statements?

Accounts Receivable is reported as a selector 1

current asset

noncurrent asset

on the balance sheet and the companys obligation for future returns, otherwise called selector 2

Allowance for doubtful accounts

Return liability

Sales return and allowances

is included in selector 3

contra assets

current liabilities

noncurrent liabilities

on the balance sheet. Sales of this nature are reported selector 4

on the income statement

on the balance sheet

in the notes to the financial statements

.

Points:

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Explanation

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Next Level

What is the conceptual advantage of recording sales returns and allowances as a reduction of revenue?

Recording the return and allowance in the period of the sale avoids selector 1

inflating

understating

sales revenue for sales that management expects will be reversed in the future.

Points: