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 $300,000. During 2018, Halifax sold merchandise on account for $11,500,000. Halifax's merchandise costs it 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 2018, and the rest being merchandise sold during 2018. 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 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

Answer -

1. Answer -

(a)Actual returns in 2018 of merchandise that was sold prior to 2018.

Year	General Journal	Debit	Credit
2018	Refund liability	$250000
	Accounts receivable		$250000
2018	Inventory	$162500
	Inventory-estimated returns		$162500

Calculation:

Cost of goods sold is 65% of sales.

Therefore,

Inventory-estimated returns = $250000 * 65% = $162500

(b) Actual returns in 2018 of merchandise that was sold during 2018.

Year	General Journal	Debit	Credit
2018	Sales returns	$200000
	Accounts receivable		$200000
2018	Inventory	$130000
	Cost of goods sold		$130000

Calculation:

Sales returns of merchandise that was sold during 2018:

= Customers returned during 2018 - Returns of merchandise that was sold prior to 2018

= $450000 - $250000

= $200000

And

Cost of goods sold is 65% of sales.

So, cost of goods sold = $200000 * 65% = $130000

(c) Adjusting refund liability to its appropriate balance at year end.

Year	General Journal	Debit	Credit
2018	Sales returns	$10000
	Refund liability		$10000
2018	Inventory-estimated returns	$6500
	Cost of goods sold		$6500

Calculation:

Estimated sales return is 4% of sales.

Therefore,

Estimated sales return = Sales * 4% = $11500000 * 4% = $460000

Therefore,

Adjusted refund liability balance:

= Estimated sales return - Customers returned during 2018

= $460000 - $450000

= $10000

And

Cost of goods sold is 65% of sales.

So, Inventory-estimated returns = $10000 * 65% = $6500

2. Answer -

The year-end refund liability after the adjusting entry is recorded = $310000

Calculation:

As per given information,

Beginning balance in refund liability = $300000

Adjusted refund liability balance (appropriate balance at year end) = $

Therefore,

Year-end refund liability (Ending balance in refund liability):

= Beginning balance in refund liability + Adjusted refund liability balance

= $300000 + $10000

= $310000