Question

Exercise 7-8 (Algo) Sales returns [LO7-4]

Halifax Manufacturing allows its customers to return merchandise for any reason up to 90 days after delivery and receive a credit to their accounts. All of Halifax's sales are for credit (no cash is collected at the time of sale). The company began 2021 with a refund liability of $450,000. During 2021, Halifax sold merchandise on account for $13,000,000. Halifax's merchandise costs is 65% of merchandise selling price. Also during the year, customers returned $514,000 in sales for credit, with $283,000 of those being returns of merchandise sold prior to 2021, and the rest being merchandise sold during 2021. Sales returns, estimated to be 4% of sales, are recorded as an adjusting entry at the end of the year.

Required:

1. Prepare entries to (a) record actual returns in 2021 of merchandise that was sold prior to 2021; (b) record actual returns in 2021 of merchandise that was sold during 2021; and (c) adjust the refund liability to its appropriate balance at year end.
2. What is the amount of the year-end refund liability after the adjusting entry is recorded?

Answer 1

Working notes:

Halifax manufacturing

Particulars	Amount($)	Explanation
Opening refund liability	$450000	A
Less: return prior to 2021	$283000	B
Balence before adjustment	$167000	C=A-B
Cost of goods sold returned prior to 2021	$183950	D=B×65%
for sales 2021
Total sales	$13000000	E
Estimated return@4%	$520000	F=E×4%
Less : already returned($514000–$283000)	$231000	G
Refund liability to be created for 2021	$289000	H=F-G
Less: Balance already in the account	$167000	see C
Amount to be adjusted	$122000	I =H-C
cost of goods sold returned in 2021
Sales return in 2021	$231000	see G
Merchandise cost at 65%	$150150	J= G×65%
Inventory estimated return for 2021
Amount to be adjusted in refund liability	$122000	see I

Merchandise cost at 65%.

$79300

K=I×65%

ANSWER 1:

JOURNAL ENTRIES

Account	Debit($)	Credit ($)	Explanation
Refund liability	283000		See note B
Account receivables		283000
Inventory	183950		See note D
Inventory estimated return		183950
Sales returns	231000		see note G
Account receivable		231000
Inventory	150150		see note J
Cost of goods sold		150150
Sales returns	122000		See note I
Refund liability		122000
Inventory estimated returns	79300		See note K
Cost of goods sold		79300

ANSWER 2– see note H

The amount of the year end refund liability after the adjustment entry is recorded is-$289000.

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