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Hi Sir,
Can you kindly explain how the answer is £200,00 credit for the below question:
Flyscreen’s retails department has been asked to give some though sold being returned. Historically, this has not been problem- over period of 25 years return has consistently been around the 7%-8% mark and a provision in anticipation of 7.5% of retail sales had been made
This year, following much stricter quality control method being applied in the production department, it is improbable that return will excess 2% of sales and could even as low as 1% of sales and even those returns will more than likely be able to be resold.Last year, revenue were $24,000,000. Probably as result of the improvement in Flyscreen’s reputation for quality goods, the sales figure this year has risen to 32,000,000 and gross profit margin improved from 20%-25%
What figure will appear in the statement of profit or loss for the movement in flyscreen provision for sales returnAnswer : $200,000 credit
Many thank for your help and Merry Christmas to you and your family.
Thuy Phan
Last year there would be a provision of 7.5% * $24,000,000 * 20%
7.5% sales returns
$24,000,000 sales revenue
20% profit= 7.5% * $24,000,000 * 20% = $360,000
This year we need a provision of 2% * $32,000,000 * 25%
2% sales returns
$32,000,000 sales revenue
25% profit= 2% * $32,000,000 * 25% = $160,000
Last year there was a provision of $360,000 and this year that figure falls to $160,000So we are able to release $200,000 of that provision figure brought forward:
Dr Provision Account $200,000
Cr Profit or loss account $200,000OK?
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