Question

10A-14 10A-3. GLOBAL supermarkets of Bunol, Spain runs a special on tomatoes during the annual La Tomatina festivall. They also run a money-back guarantee for anyone with unused tomatoes who is not completely satisfied with their aerodynamic qualities. From past history, GLOBAL knows that only 1.5% of the tomatoes will be returned. This year they sell 400,000 kilograms of tomatoes at a price of 0.40 euros per kilo. Required 1. Show the adjusting T-account entry necessary to record the liability created by the money-back guarantee 2. Show the entry that GLOBAL will have to make when a soggy-but-happy customer returns a kilo of tomatoes sometime after the adjusting entry in requirement 1 is made.

Answer 1

Answer to 1

Calculation of liability to be created:  

= Sales units X Return percentage X Price per unit

= 400000 X 1.5% X 0.4

= 2400 Euros

Journal entry:

Profit and loss account Dr. 2400

Provision - Money Back Guarantee Cr. 2400

T Account:

Provision - Money back guarantee
To closing balance	2,400	By Profit and loss account	2,400

Answer to 2:

Actual return of 1 kilo tomatoes

Journal entry:

Provision - Money Back Guarantee    Dr. 0.4

Cash Cr. 0.4

T- Accounts:

Provision - Money back guarantee
To cash	0.40	By Profit and loss account	2,400
To closing balance	2,399.60