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 2018 with a refund liability of $380,000. During 2018, Halifax sold merchandise on account for $12,300,000. Halifax's merchandise costs it 70% of merchandise selling price. Also during the year, customers returned $603,000 in sales for credit, with $333,000 of those being returns of merchandise sold prior to 2018, and the rest being merchandise sold during 2018. Sales returns, estimated to be 5% of sales, are recorded as an adjusting entry at the end of the year.

Required:

1. Prepare entries to (a) record actual returns in 2018 of merchandise that was sold prior to 2018; (b) record actual returns in 2018 of merchandise that was sold during 2018; 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

Thank you for your patience. Please give positive ratings so I can keep answering. It would help me a lot. Please comment if you have any query. Thanks!

Halifax Manufacturing
Opening refund liability	380,000.00	A
Less: Returns prior to 2021	333,000.00	B
Balance before adjustment	47,000.00	C=A-B
Cost of goods sold returned prior to 2021	233,100.00	D= B*70%
For 2021
Total Sales	12,300,000.00	E
Estimated Returns @ 5%	615,000.00	F=E*5%
Less: Already returned	270,000.00	G
(603,000- 333,000)
Refund liability to be created for 2021	345,000.00	H=F-G
Less: Balance already in the account	47,000.00	See C
Amount to be adjusted	298,000.00	I=H-C
Cost of goods sold returned in 2021
Sales returns in 2021	270,000.00	See G
(603,000- 333,000)
Merchandise costs at 70%	189,000.00	J=G*70%
Inventory- estimated returns for 2021
Amount to be adjusted in refund liability	298,000.00	See I
Merchandise costs at 70%	208,600.00	K=I*65%
Part 1
Journal Entries
Account	Debit $	Credit $
Answer 1- Record the actual sales return of merchandise sold prior to 2021
Refund Liability	333,000.00		See Note B
Accounts Receivable		333,000.00
Answer 2- Record the cost of merchandise returned for goods sold prior to 2021
Inventory	233,100.00		See Note D
Inventory- estimated returns		233,100.00
Answer 3- Record the actual sales return of merchandise sold during 2021
Sales returns	270,000.00		See Note G
Accounts Receivable		270,000.00
Answer 4- Record the cost of merchandise returned for goods sold during 2021
Inventory	189,000.00		See Note J
Cost of goods sold		189,000.00
Answer 5- Record the year end adjusting entry for estimated returns
Sales returns	298,000.00		See Note I
Refund liability		298,000.00
Answer 6- Record the adjusting entry for the estimated return of merchandise to inventory.
Inventory- estimated returns	208,600.00		See Note K
Cost of goods sold		208,600.00
Answer 2- See Note H
The amount of the year end refund liability after the adjustment entry is recorded is- $ 345,000. See Note H.