During 2018, its first year of operations, Hollis Industries recorded sales of $11,500,000 and experienced returns of $700,000. Cost of goods sold totaled $6,900,000 (60% of sales). The company estimates that 7% of all sales will be returned. Prepare the year-end adjusting journal entries to account for anticipated sales returns, assuming that all sales are made on credit and all accounts receivable are outstanding.

Dr sales return  $105,000

Cr allowance for sales returns  $105,000

Explanation:

The estimated sales return is 8% of total sales

total sales=costs of goods sold*100/60=$6,900,000*100/60=$11,500,000.00  

Actual returns till date=$700,000

Year-end adjusting in respect of sales returns is the estimated sales return minus the actual return till date as calculated thus:

estimated sales return=$11,500,000*7%=$805,000

Year-end adjusting amount=$805,000.00-$700,00.00=$105,000.00

The appropriate entries would to debit sales returns with $105,000 while allowance for sales returns is credited  

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