PiCo uses the perpetual method. On February 17, FiCo sells $30,000 in merchandise on account that costs $10,000. On February 23, 10% of these goods are returned. Prepare the entry that Pico makes on February 23 to record the sales return.

a. debit Sales Returns $3,000 and credit Accounts Receivable $3,000

b. debit Sales Returns $1,000, debit Gross Profit $2,000, and credit Accounts Receivable $3,000

c. debit Sales Returns $3,000 and credit Accounts Receivable $3,000 and then debit Inventory $1,000 and credit Cost of Goods Sold $1,000

d. debit Sales Returns $3,000 and credit Accounts Receivable $3,000 and then debit Inventory $1,000 and credit Purchase Returns $1,000

The correct answer is

During the sales, the entry for the sales will be an increase in accounts receivable and sales by $30,000. The entry for the cost is an increase in cost of goods sold and decrease in inventory by $10,000.

10% of the accounts receivable is = $30,000 x 10% = $3,000.

10% of the cost of the inventory is = $10,000 x 10% = $1,000.

On February 23, the 10% return will be recorded in two journal entries:

1. Increase of sales return and decrease of accounts receivable by $3,000. Debit sales returns and Credit Accounts receivable.
2. Increase of Inventory and decrease of cost of goods sold by $1,000. Debit Inventory and credit cost of goods sold.

Thus, the correct answer is c. debit Sales Returns $3,000 and credit Accounts Receivable $3,000 and then debit Inventory $1,000 and credit Cost of Goods Sold $1,000.