Introduction:
TechCo, a company that manufactures electronic gadgets, sold some finished goods to a customer. However, the customer later decided to return the products. TechCo accepted the return but charged the customer a restocking fee. The original sale and the restocking fee were subject to VAT.
The Situation:
TechCo sold 10 units of electronic gadgets to a customer at $100 per unit. The total sales amount was $1,000. The sale was subject to a 10% VAT, so the total amount paid to TechCo by the customer was $1,100.
After a few days, the customer returned all 10 units. TechCo accepted the return but charged a $100 restocking fee. The restocking fee was also subject to a 10% VAT.
Case Facts:
Original sales amount (excluding VAT): $1,000
VAT (10%) on the original sale: $100
Total amount (including VAT) initially paid by the customer: $1,100
Restocking fee charged by TechCo (excluding VAT): $100
VAT (10%) on the restocking fee: $10
Total restocking fee (including VAT): $110
Cash amount refunded to the customer: $990 ($1,100 - $110)
IFRS Journal Entries
Original Sale (For Reference):
Debit: Cash/Bank for $1,100 (total amount received including VAT)
Credit: Sales Revenue for $1,000 (sale amount before VAT)
Credit: VAT Payable for $100 (VAT on the sale)
Sales Returns:
Debit: Sales Returns and Allowances $1,000
Debit: VAT Payable $100
Credit: Cash/Bank $1,100
Restocking Fee:
Debit: Cash/Bank $110
Credit: Other Income - Restocking Fee $100
Credit: VAT Payable $10
Inventory Return:
Debit: Inventory - Finished Goods $700
Credit: COGS $700
Inventory Impairment:
Debit: COGS - Impairment - Finished Goods Inventory $200
Credit: Impairment - Finished Goods Inventory $200
Explanation:
Sales Returns and Allowances (Debit): Reverses the revenue from the original sale.
VAT Payable (Debit/Credit): Adjusts for the VAT related to the sale and restocking fee.
Cash/Bank (Debit/Credit): Reflects the cash outflow for the refund and the cash inflow from the restocking fee.
Other Income - Restocking Fee (Credit): Records the income from charging the restocking fee.
Inventory - Finished Goods (Debit): Adds the returned goods back to inventory.
COGS (Credit): Reverses the cost associated with the returned goods.
Inventory Impairment (Debit): Reduces the value of the finished goods inventory returned by the customer.
This case study helps illustrate how TechCo manages product returns, charges restocking fees, and accounts for VAT in these transactions. The journal entries ensure that all aspects of the transaction are accurately reflected in TechCo’s financial records.
Disclaimer: This case study is designed to enhance digital financial literacy and business management skills among students, to help them apply these concepts in real-world scenarios to boost their earnings, employability and entrepreneurial potential. The case was edited by Razi Amin, a Harvard MBA with 30+ years of leadership and advisory experiences at major international banks in New York, London, Hong Kong and Washington, DC. Razi is also a member of Harvard Alumni for Global Women's Empowerment. While AI technology was used for prompt-engineering to generate case content, every case has been rigorously reviewed and edited to ensure accuracy, clarity, and educational effectiveness. Reproduction of this case material is prohibited without permission from ASPEN Capital Solutions LLC.
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