Question

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 $300,000. During 2021, Halifax sold merchandise on account for $11,500,000. Halifax's merchandise costs is 65% of merchandise selling price. Also during the year, customers returned $450,000 in sales for credit, with $250,000 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

1.

(a) record actual returns in 2021 of merchandise that was sold prior to 2021

2021 Refund liability A/c Dr.............................$250,000

Account Receivables A/c Cr..................................$250,000

(b) record actual returns in 2021 of merchandise that was sold during 2021

2021 Sales returns A/c Dr.................................$200,000 ($450,000-$250,000)

   Account Receivables A/c Cr..................................$200,000

(c)adjust the refund liability to its appropriate balance at year end

2021 Sales Return A/c Dr .........................$210,000

Refund liabalility A/c Cr....................................$210,000

($11,500,000*4%- $250,000)(current year adjustment - previous year)

2.

Beginning balance in refund liability	$  300,000.00
Less: Actual returns of pre year	$ (250,000.00)
Plus: adjustment needed for current year	$  210,000.00
Ending balance in refund liability (equal to amount estimated as necessary for remaining returns of 2021 sales)	$  260,000.00