[Oimie]

NINJA Question –

A company’s activities for Year 2 included the following:

Gross sales: $3,600,000

Cost of goods sold: 1,200,000

Selling and administrative expense: 500,000

Adjustment for a prior-year understatement of amortization expense: 59,000

Sales returns: 34,000

Gain on sale of available-for-sale securities: 8,000

Gain on disposal of a discontinued business segment: 4,000

Unrealized gain on available-for-sale securities: 2,000

The company has a 30% effective income tax rate. What is the company’s net income for Year 2?

The answer is

3600 Sales

-1200 COGS

-500 Selling expense

-34 Sales returns

+8 Gain on sale of AFS

+4 Gain on Disposal

= 1878 less 30% income tax = 1314.6

My question is, since there are sales returns of $34,000, shouldn’t we decrease the COGs by a proportionate amount?

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Anonymous]

Hi Oimie. Your observation would be correct if we looked at “Sales Returns” as a transaction and then did the JE's for the transaction. However, you should look at the given info as simply accounts in the income statement along with their balances. As an account, Sales Returns offsets Gross Sales to get Net Sales and COGS is not affected. Hope this helps! Sounds like you're doing very well and thinking critically with the questions, which is great practice.

[Oimie]

@atl cpa: Thank you very much kind sir!

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Author]

Replies