Lopez Company reports unadjusted first-year merchandise sales of $$ \$ 124,000 $$ and cost of merchandise sales of $$ \$ 31,000 $$. a. Compute gross profit using the unadjusted numbers above. b-1.\&2. The company expects future returns and allowances equal to $$ 1 \% $$ of sales and $$ 1 \% $$ of cost of sales. Prepare the year-end adjusting entry to record the sales expected to be refunded and cost side of sales returns and allowances. b-3. Recompute gross profit using the adjusted numbers from parts 1 and 2 . c. Is Sales Refund Payable an asset, liability, or equity account? d. Is Inventory Returns Estimated an asset, liability, or equity account?

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**a. Compute Gross Profit**

Unadjusted merchandise sales:  
$$
124{,}000
$$
Unadjusted cost of merchandise sales:  
$$
31{,}000
$$

Gross profit is calculated as:  
$$
\text{Gross Profit} = \text{Sales} - \text{Cost of Merchandise Sales}
$$
Substituting the numbers we get:  
$$
\text{Gross Profit} = 124{,}000 - 31{,}000 = 93{,}000
$$

---

**b-1. & b-2. Prepare the Year-End Adjusting Entry**

The company expects returns and allowances equal to $$ 1\% $$ of sales and $$ 1\% $$ of cost of sales.

1. **Sales Side:**

- Expected sales refunds:  
     $$
     1\% \text{ of } 124{,}000 = 0.01 \times 124{,}000 = 1{,}240
     $$
     
   - Adjusting entry for the sales side:
     - Debit: Sales Returns and Allowances $$ \$1{,}240 $$
     - Credit: Sales Refund Payable $$ \$1{,}240 $$

2. **Cost Side:**

- Expected cost of returns (or cost allowances):  
     $$
     1\% \text{ of } 31{,}000 = 0.01 \times 31{,}000 = 310
     $$
     
   - Adjusting entry for the cost side:
     - Debit: Inventory Returns Estimated $$ \$310 $$
     - Credit: Cost of Merchandise Sales $$ \$310 $$

Thus, the overall adjusting entries are:

$$
\begin{array}{rcl}
\text{Debit: Sales Returns and Allowances} & 1{,}240 & \
\text{Credit: Sales Refund Payable} & & 1{,}240 \
\
\text{Debit: Inventory Returns Estimated} & 310 & \
\text{Credit: Cost of Merchandise Sales} & & 310 \
\end{array}
$$

---

**b-3. Recompute Gross Profit Using the Adjusted Numbers**

1. **Adjusted Sales:**

$$
   124{,}000 - 1{,}240 = 122{,}760
   $$

2. **Adjusted Cost of Merchandise Sales:**

$$
   31{,}000 - 310 = 30{,}690
   $$

3. **Adjusted Gross Profit:**

$$
   \text{Gross Profit} = 122{,}760 - 30{,}690 = 92{,}070
   $$

---

**c. Classification of Sales Refund Payable**

Sales Refund Payable is credited when recording the expected future refunds. Since it represents an obligation of the company, it is classified as a:

$$
\textbf{Liability}
$$

---

**d. Classification of Inventory Returns Estimated**

Inventory Returns Estimated is debited in the cost-side entry to reduce the cost of merchandise sales by the estimated return cost. This account represents the amount of cost that is expected to be recovered (or the reduction in cost when items are returned) and is reported on the balance sheet offsetting the related inventory accounts. Therefore, it is classified as an:

$$
\textbf{Asset}
$$
**a. Gross Profit** Gross Profit = \$124,000 - \$31,000 = \$93,000 **b-1. & b-2. Adjusting Entries** - **Sales Side:** Debit: Sales Returns and Allowances \$1,240 Credit: Sales Refund Payable \$1,240 - **Cost Side:** Debit: Inventory Returns Estimated \$310 Credit: Cost of Merchandise Sales \$310 **b-3. Recomputed Gross Profit** Adjusted Sales: \$124,000 - \$1,240 = \$122,760 Adjusted Cost of Merchandise Sales: \$31,000 - \$310 = \$30,690 Adjusted Gross Profit: \$122,760 - \$30,690 = \$92,070 **c. Sales Refund Payable** Liability **d. Inventory Returns Estimated** Asset

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