Chico Company allows its customers to return merchandise within 30 days of purchase - At December 31 , the end of its first year of opcrations, Chico estimates fulure period merchandise returns of $$ \$ 63,000 $$ (rost of $$ \$ 24,000 $$ ) related to its current year sales - A few days later on January 3, a customer returns merchandise with a selling price of $$ \$ 2.150 $$ for a cash refund, the returned merchandise cost $$ \$ 780 $$ and is returned to inventory as it is not defective a. Prepare the December 31 year-end adjusting journal entry for estimated future sales returns and allowances (revenue side) b. Prepare the December 31 year end adjusting journal entry for estimated future inventory returns and allowances (cost side) c. Prepare the January 3 journal entries to record the merchandise returned Viow transestion list

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**a. December 31 Adjusting Entry (Revenue Side)**

Chico Company estimates that future merchandise returns will reduce its recorded sales. To record the estimated sales returns allowance of 
$$
\$63,\!000
$$
the journal entry is:

- Debit: Sales Returns and Allowances $$\$63,\!000$$  
- Credit: Allowance for Sales Returns $$\$63,\!000$$

This entry reduces net revenues by anticipating that some of the sales will eventually be reversed when returns occur.

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**b. December 31 Adjusting Entry (Cost Side)**

Since the estimated returns have an associated cost of 
$$
\$24,\!000,
$$
Chico Company also adjusts for the expected cost impact. The entry increases inventory (restoring the cost of merchandise expected to be returned) and reduces cost of goods sold:

- Debit: Merchandise Inventory $$\$24,\!000$$  
- Credit: Cost of Goods Sold $$\$24,\!000$$

This entry reflects that if the merchandise is returned, its cost will no longer be an expense.

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**c. January 3 Journal Entries (Actual Return Transaction)**

On January 3, a customer actually returns merchandise that was sold for 
$$
\$2,\!150
$$
with an original cost of 
$$
\$780.
$$

*Sales Side – Processing the Cash Refund for the Returned Merchandise:*

Since an estimated allowance was previously recorded, the actual return is charged against that allowance:
- Debit: Allowance for Sales Returns $$\$2,\!150$$  
- Credit: Cash $$\$2,\!150$$

This entry removes part of the previously established allowance and records the cash refund.

*Cost Side – Recording the Return of Merchandise to Inventory:*

The cost of the returned merchandise is restored to inventory and the cost of goods sold is reduced accordingly:
- Debit: Cost of Goods Sold $$\$780$$  
- Credit: Merchandise Inventory $$\$780$$

This entry reverses part of the earlier cost adjustment for expected returns.
**a. December 31 Adjusting Entry (Revenue Side):** - Debit: Sales Returns and Allowances \$63,000 - Credit: Allowance for Sales Returns \$63,000 **b. December 31 Adjusting Entry (Cost Side):** - Debit: Merchandise Inventory \$24,000 - Credit: Cost of Goods Sold \$24,000 **c. January 3 Journal Entries (Actual Return Transaction):** - Debit: Allowance for Sales Returns \$2,150 - Credit: Cash \$2,150 - Debit: Cost of Goods Sold \$780 - Credit: Merchandise Inventory \$780

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