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 $330,000. During 2021, Halifax sold merchandise on account for $11,800,000. Halifax's merchandise costs it 70% of merchandise selling price. Also during the year, customers returned $345,000 in sales for credit, with $191,000 of those being returns of merchandise sold prior to 2021, and the rest being merchandise sold during 2021. Sales returns, estimated to be 3% 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?

the questions are

Record the year-end adjusting entry for estimated returns.

Record the adjusting entry for the estimated return of merchandise to inventory.

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	191000
		Accounts receivable		191000
		(To record sales returns of merchandise sold prior to 2021)
	2021	Inventory ($191000 x 70%)	133700
		Inventory-estimated returns		133700
		(To record cost of merchandise returned)
(b)	2021	Sales returns ($345000 - $191000)	154000
		Accounts receivable		154000
		(To record sales returns of merchandise sold during 2021)
	2021	Inventory ($154000 x 70%)	107800
		Cost of goods sold		107800
		(To record cost of merchandise returned)
(c)	2021	Sales returns	61000
		Refund liability		61000
		(To record adjustment for refund liability)
	2021	Inventory-estimated returns	42700
		Cost of goods sold (70% x $61000)		42700
		(To record adjustment for estimated sales returns)

2. Year-end refund liability = (3% x $11800000) - $154000 = $354000 - $154000 = $200000

Working:

Refund Liability
Beg. Bal.		330000
(a)	191000
		61000	Adjustment
End. Bal.		200000