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12 May, 03:01

On July 10, 2020, Carla Music sold CDs to retailers on account and recorded sales revenue of $686,000 (cost $528,220). Carla grants the right to return CDs that do not sell in 3 months following delivery. Past experience indicates that the normal return rate is 15%. By October 11, 2020, retailers returned CDs to Carla and were granted credit of $75,900. Prepare Carla's journal entries to record (a) the sale on July 10, 2020, and (b) $75,900 of returns on October 11, 2020, and on October 31, 2020. Assume that Carla prepares financial statement on October 31, 2020.

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  1. 12 May, 03:07
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    account receivable 686,000 debit

    sales revenue 686,000 credit

    --to record the sale--

    Cost of goods sold 528,220 debit

    Inventory 528,220 credit

    --to record cost of goods sold--

    warrant expense 102,900 debit

    warrant liablity 102,900 credit

    --to record expected returns--

    warrant liability 75,000 debit

    account receivable 75,000 credit

    --to record actual returns--

    Explanation:

    The sale of the CDs will be recorded like a common sale, but we will also stablish a warrant liability for returns:

    This is done to match the expense of the returned CD's to the period of the sales which generated this returns:

    warrant liablity 15% of 686,000 = 102,900

    then, when actual returns ocurs: we will decrease the account receivable of the customer.
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