Towbin Products sells merchandise on credit for $7,000 on December 1, 2007. The company estimates that returns and allowances will amount to 4% of sales. On December 22, 2007, a customer returns for credit merchandise originally sold on December 1 for $200.
Required
1. Prepare journal entries to record the preceding sale and the return of merchandise if returns are recorded as they occur.
2. Prepare journal entries to record the preceding sale, the estimation of returns and allowances, and the actual return of goods, if returns and allowances are estimated at the end of the period of sale.
3. How would the preceding information be reflected on Towbin's December 31, 2007 financial statements if
(a) Returns are recorded as they occur, and
(b) Returns are estimated in the period of sale?