Question 3 Credit Sales with right of return

a Units Price Total

Receivable 200 $ 50 $ 10,000 (200 units*$50)
Expected Returns 2 $ 50 $ 100 (2 units *$50)
Revenue 198 $ 9,900 ($10000-$100

The income from the transaction varies as the consumer has the right to return the
product for a full refund. The buyer pays for all 200 items at the time of the sale, but
the seller assumes that 2 items are likely to be returned and thus creates a provision.
Hence revenue is calculated by subtracting expected units returned from the total
units sold (Receivable)

b Dr Provision for Refund $ 100

Cr Cash $ 100 (2 units*$50)
Records refund of 2 items originally sold for $50
The seller pay for the 2 items and reduces the provision which was created at the
time of the sale.

Dr Inventory $ 80
Cr Right to Recover $ 80 (2 units*$40)
Cost to Recover 2 returned items at $40
The seller recovers the 4 items from the customer and returns them into the
inventory and reduces the right to cover the item meaning that the right to cover
asset has been exchanged for another inventory.
Sales Price per unit $ 50
Units sold 200
Unit cost $ 40
Expected units return 2

Information is summarised from

the question