Jul 5 A customer returned stock to the business that was sold for $400 (cost price $200) (Credit note 67). State the effect to Owner's Equity of the above transaction.

Question

Jul 5  A customer returned stock to the business that was sold for $400 (cost price $200) (Credit note 67). State the effect to Owner's Equity of the above transaction.

BlackTom AI · Accepted Answer

Question restatement: A customer returned stock to the business that was sold for $400 (cost price $200). Credit note 67. State the effect to Owner's Equity of the above transaction.

Option analysis:
- The given option is: b. Decrease by $200.

Step-by-step reasoning:
1) Consider the original sale: Revenue increases by 400 and the cost of goods sold (COGS) increases by 200, which, in terms of net income, yields a gross profit of 200. The effect on Owner's Equity at the time of the sale is an increase of net income by 200, all else equal.
2) Consider the return of goods: A return reduces revenue and also reduces the COGS when the goods are returned to inventory. The typical accounting entries to reverse the sale are: Debit Sales Returns and Allowances (reduces net sales) by 400 and Credit Accounts Receivable (or Cash) by 400; and Debit Inventory by 200 and Credit COGS by 200 (restoring inventory and reducing the expense).
3) Net effect on net income: The reversal of revenue (400) lowers net income by 400, while the reversal of COGS (200) increases net income by 200. The combined effect on net income is -400 + 200 = -200.
4) Consequently, Owner's Equity decreases by 200 because retained earnings (a component of Owner's Equity) fall by the amount of the net income decrease.

Why this conclusion fits the transaction:
- The sale created positive net income, but the return reduces revenue more than it reduces COGS, leading to an overall decrease in net income.
- The overall impact on Owner's Equity equals the net income effect, since Owner's Equity is tied to retained earnings.

Why other (unlisted) options would be incorrect if they were present:
- If an option said 'Decrease by $400,' that would ignore the 200 recovery from reducing COGS; it overstates the impact on net income.
- If an option claimed an increase in Owner's Equity, that would contradict the net income reduction caused by reversing revenue.
- If an option claimed no effect on Owner's Equity, that would ignore the revenue and COGS reversals that alter profit and thus equity.

In summary, the return reduces revenue by 400 and reduces COGS by 200, yielding a net decrease in Owner's Equity of 200, which aligns with the option stating a decrease by 200.

Jul 5 A customer returned stock to the business that was sold for $400 (cost price $200) (Credit note 67). State the effect to Owner's Equity of the above transaction.

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