Question

Hoover 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 Hoover's sales are for credit (no cash is collected at the time of sale). The company began 2021 with a refund liability of $450,000. During 2021, Hoover sold merchandise on account for $13,000,000. Hoover's merchandise costs it 65% of merchandise selling price. Also during the year, customers returned $514,000 in sales for credit, with $283,000 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. The amount to adjust the refund liability to its appropriate balance at year-end would be:

A)252,000

B)231,000

C)167,000

D)122,00

Answer 1

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Hoover Manufacturing
Opening refund liability	450,000.00	A
Less: Returns prior to 2021	283,000.00	B
Balance before adjustment	167,000.00	C=A-B
For 2021
Total Sales	13,000,000.00	D
Estimated Returns @ 4%	520,000.00	E=D*4%
Less: Already returned	231,000.00	F
(514,000- 283,000)
Refund liability to be created for 2021	289,000.00	G=E-F
Less: Balance already in the account	167,000.00	See C
Amount to be adjusted	122,000.00	H=G-C