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 $360,000. During 2021, Halifax sold merchandise on account for $12,100,000. Halifax's merchandise costs is 70% of merchandise selling price. Also during the year, customers returned $594,000 in sales for credit, with $328,000 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

No	Date	Accounts	Debit	Credit
[a]	2021	Refund Liability	$        $328,000
		Accounts Receivables		$        $328,000
[a]	2021	Inventory [328,000*70/100]	$        229,600
		Inventory Estimated Returns		$        229,600
[b]	2021	Sales Returns [$594,000-$328,000]	$        266,000
		Accounts Receivables		$        266,000
[b]	2021	Inventory [266,000*70/100]	$        186,200
		Cost of goods sold		$        186,200
[c]	2021	Sales Returns [($12,100,000*5/100)-266,000-($360,000-328,000)] = 605,000-266000- 32000	$ 307,000
		Refund Liability		$        307,000
[c]	2021	Inventory Estimated Returns [307,000*70/100]	$        214,900
		Cost of goods sold		$        214,900

Requirement:2

Refund Liability Year end = $339,00

Calculation:

Refund Liability = (12,100,000*5/100)-266,000 = $339,000

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