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 $420,000. During 2021, Halifax sold merchandise on account for $12,700,000. Halifax's merchandise costs is 60% of merchandise selling price. Also during the year, customers returned $619,000 in sales for credit, with $342,000 of those being returns of merchandise sold prior to 2021, and the rest being merchandise sold during 2021. 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 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

Requirement 1

Date	Particulars	Debit ($)	Credit ($)
a	Refund liability	342,000
	Accounts receivable		342,000
	Inventory	205,200
	Inventory - estimated returns (342,000*60%)		205,200
b	Sales returns	277,000
	Accounts receivable (619000-342000)		277,000
	Inventory	166,200
	Cost of goods sold (277,000*60%)		166,200
c	Sales returns	16000
	Refund liability		16000
	(12700,000*5%)-619000
	Inventory-Estimated returns	9600
	Cost of goods sold (16000*60%)		9600

Requirement 2

Descriptions	Amount
1) Opening Balance in Provisions for Sales Return	420,000
2) Add: Provisions for the year	635,000
3) Gross provisions at end of the year	975,000
4) Less : Actual Returns	619,000
5) Closing Balance of the provisions for Sales Returns	356,000