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 $410,000. During 2021, Halifax sold merchandise on account for $13,500,000. Halifax's merchandise costs is 65% of merchandise selling price. Also during the year, customers returned $532,000 in sales for credit, with $294,000 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.

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

1.

No.	Date	General Journal	Debit	Credit
(a)	2021	Refund liability	294000
		Accounts receivable		294000
		(To record sales returns of merchandise sold prior to 2021)
	2021	Inventory ($294000 x 65%)	191100
		Inventory-estimated returns		191100
		(To record cost of merchandise returned)
(b)	2021	Sales returns ($532000 - $294000)	238000
		Accounts receivable		238000
		(To record sales returns of merchandise sold during 2021)
	2021	Inventory ($238000 x 65%)	154700
		Cost of goods sold		154700
		(To record cost of merchandise returned)
(c)	2021	Sales returns	186000
		Refund liability		186000
		(To record adjustment for refund liability)
	2021	Inventory-estimated returns	120900
		Cost of goods sold (65% x $186000)		120900
		(To record adjustment for estimated sales returns)

2. Year-end refund liability = (4% x $13500000) - $238000 = $540000 - $238000 = $302000

Working:

Refund Liability
Beg. Bal.		410000
(a)	294000
		186000	Adjustment
End. Bal.		302000