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. 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

	Account Titles	Debit	Credit
a	Allowance for Refund Liability	$        2,50,000
	Accounts Receivable		$      2,50,000
	Inventory	$        1,62,500
	Cost of Goods Sold		$      1,62,500
b	Sales returns and allowances	$        2,00,000
	Accounts Receivable		$      2,00,000
	Inventory	$        1,30,000
	Cost of Goods Sold		$      1,30,000
c	Sales returns and allowances	$        4,10,000
	Allowance for Refund Liability		$      4,10,000
	Inventory	$        2,66,500
	Cost of Goods Sold		$      2,66,500

2.
Year end refund liability = $11500000 x 4% = $460000