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.

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

Part 1 - Journal Entries

To record the actual sales return during the year:

	Dr	Cr
Sales Return A/C	$ 450,000
To Accounts Receivable A/C		$ 450,000
( Being actual sales return is accounted )

To record the return of merchandise at its cost:

	Dr	Cr
Inventory A/C	$ 292,500
To Cost of good sold A/C		$ 292,500
( Being a return is accounted. )

* $ 292,500 = $ 450,000 * 65%

To record the adjusting entry for estimated return during the year:

	Dr	Cr
Sales Return A/C	$ 10,000
To Allowance for Sales Return A/C		$ 10,000
( Being adjusting entry for estimated returns )

* $ 10,000 = ($ 11,500,000*4%) - $ 450,000

To record the return of merchandise at its cost:

	Dr	Cr
Inventory A/C	$ 6,500
To Cost of good sold A/C		$ 6,500
( Being a estimated return is accounted. )

* $ 6,500 = $ 10,000 * 65%

Part 2 - Amount of the year-end refund liability after the adjusting entry is recorded

Particulars	Amount
Opening Balance	$ 300,000
Add- Estimated Return ( $11,500,000*4% )	$ 460,000
Less-Actual Return	( $ 450,000 )
Closing Balance	$ 310,000

Year-end refund liability after the adjusting entry is recorded is $ 310,000