Hahn Flooring Company uses a perpetual inventory system.

A. Sales returns of $97,650 and merchandise returns of $48,100 are estimated for the current year's sales.

B. The inventory account has a balance of $673,400, while physical inventory indicates that $663,800 of merchandise is on hand.

Journalize the December 31 adjusting entries based on the above transactions. Assume that the inventory shrinkage is a normal amount. Refer to the Chart of Accounts for exact wording of account titles.

Answer and Explanation:

The adjusting journal entries are as follows

1. Sales $97,650

To Customer refunds payable $97,650

(Being the sales return is recorded)

For recording this we debited the sales as it reduced the sales and credited the customer refund payable as it increased the liabilities

2. Estimated Returns inventory $48,100

To Cost of goods sold $48,100

(Being the merchandise return is recorded)

For recording this we debited the estimated returns inventory and credited the cost of goods sold

3. Cost of goods sold $9,600

To Inventory $9,600

(Being the inventory shrinkage is recorded)

For recording this we debited the cost of goods sold as it increased the expenses and credited the inventory as it reduced the assets

The computation is shown below:

= Balance of inventory account - physical inventory merchandise on hand

= $673,400 - $663,800

= $9,600