Question

Holly uses a perpetual inventory system. Holly sells $3,500 of blue jeans. The customer later brings $420 of blue jeans back to Holly because they are defective. Those blue jeans had a cost of $140. The customer agrees to keep the blue jeans and Holly agrees to a $140 allowance. Which of the following is one of the entries that Holly will use to record the return?
A. Debit Cash for $140 and credit Inventory for $140.B. Debit Inventory for $140 and credit Cash for $140.C. Debit Cash for $140 and credit Sales Revenue for $140.D. Debit Sales Revenue for $140 and credit Cash for $140.

Answer 1

Answer:

D. Debit Sales Revenue for $140 and credit Cash for $140.

Explanation:

The journal entry to record the sale:

Dr Cash 3,500

    Cr Sales revenue 3,500

Dr Cost of goods sold XY

    Cr Merchandise inventory XY

The journal entry to record the allowance for the defective merchandise:

Dr Sales revenue (or sales returns and allowances) 140

    Cr Cash 140

Sales returns and allowances account is a contra revenue account that decreases sales revenue. In this case, the company uses only sales revenue account which is reduced by debiting it.