Q26E - Horngren'S Financial And Managerial Accounting

Question

Emerson St. Book Shop’s unadjusted Merchandise Inventory at June 30, 2018 was \(5,200. The cost associated with the physical count of inventory on hand on June 30, 2018, was \)4,900. In addition, Emerson St. Book Shop estimated approximately \(1,000 of merchandise sold will be returned with a cost of \)400.

Requirements

1. Journalize the adjustment for inventory shrinkage. 

2. Journalize the adjustment for estimated sales returns.

Step-by-Step Solution

Answer

The inventory shrinkage expense of the company is $300.

Step 1: Meaning of Adjusting Entries

In accounting practice, adjusting entries are recorded in the books at the end of an accounting period. Adjusting entries are passed after drafting the trial balance, and it facilitates the business entities to reflect their revenues and expenses correctly.

Step 2: Preparation of adjustment entry for inventory shrinkage

Date	Accounts and Explanation	Debit ($)	Credit ($)
2018
Jun 30	Cost of goods sold (5200-4900)	300
	Merchandise inventory		300
	(To record the inventory shrinkage)

Step 3: Preparation of adjustment entry for estimated sales returns

Date	Accounts and Explanation	Debit ($)	Credit ($)
2018
Jun 30	Sales revenue	1,000
	Refunds payable		1,000
	(To record the refunds payable)
Jun 30	Estimated returns inventory	400
	Cost of goods sold		400
	(To record the cost of goods sold)