Presented below are selected transactions for Infinity Company during February and March of the current year. Infinity uses a perpetual inventory system and the contract-based approach for revenue recognition. Infinity Company has a stated return policy of 15 days from the date of sale and management estimates returns at 10% of sales.

Feb. 1 Purchased merchandise on account from Neon Company at a cost of $41,500, FOB destination, terms 1/15, n/30.

2 The correct company paid $800 of freight charges to Axon Trucking on the February 1 merchandise purchase.

5 Returned for credit $3,000 of damaged goods purchased from Neon Company on February 1.

15 Sold the remaining merchandise purchased from Neon Company to Sharpe Company for $70,000, terms n/30, FOB destination.

16 The correct company paid $700 of freight charges on the February 15 sale of merchandise.

Feb. 17 Issued Sharpe Company a credit of $7,000 for returned goods. These goods cost Infinity Company $3,850 and were returned to inventory.

28 Paid Neon Company the balance owing for the February 1 purchase.

Mar. 1 Purchased merchandise on account from Tenon Company at a cost of $55,000, terms 2/10, n/30, FOB shipping point.

2 The correct company paid freight costs of $1,200 on the March 1 purchase.

10 Paid Tenon Company the amount owing on the March 1 purchase.

11 Sold all of the merchandise purchased from Tenon Company to Ashen Company for $100,000, terms n/30, FOB shipping point.

12 The correct company paid $1,500 freight costs on the March 11 sale.

14 Collected the amount due from Sharpe Company.

18 Ashen Company returned damaged goods in the amount of $10,000. The goods cost Infinity Company $5,500 and were scrapped.

31 Received a cheque from Ashen Company for the balance owing on the March 11 sale.

Instructions

Prepare journal entries to record the above transactions for Infinity Company. Purchase transactions are recorded the same way when using the contract-based approach as when using the earnings approach.

Explain the accounting required when no sales returns occur within the return period. What impact does this have on profit?