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At the start of the year a merchandiser estimates sales returns of $450 with a related inventory cost of $300. Which pair of entries records this estimate under the perpetual system?
ADebit Allowance for Sales Returns $450 / credit Sales Returns $450; debit Cost of Sales $300 / credit Estimated Inventory Returns $300
BDebit Sales Returns $450 / credit Allowance for Sales Returns $450; debit Estimated Inventory Returns $300 / credit Cost of Sales $300
CDebit Sales Returns $450 / credit Cash $450; debit Cost of Sales $300 / credit Merchandise Inventory $300
DDebit Sales $450 / credit Allowance for Sales Returns $450; debit Estimated Inventory Returns $300 / credit Sales $300
Answer & Solution
Correct answer: B. Debit Sales Returns $450 / credit Allowance for Sales Returns $450; debit Estimated Inventory Returns $300 / credit Cost of Sales $300
1. The revenue-side estimate debits Sales Returns (contra revenue) $450 and credits Allowance for Sales Returns $450.
2. The inventory-side estimate debits Estimated Inventory Returns (asset) $300 and credits Cost of Sales $300, anticipating goods coming back.
3. Option B reverses both estimate entries.
4. These are estimates, not actual cash or inventory movements, so Cash (option C) and Sales (option D) are wrong.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §3.3 "Basic Merchandising Transactions (Perpetual Inventory System)", p.96_
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