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 $390,000. During 2021, Halifax sold merchandise on account for $12,800,000. Halifax's merchandise costs is 70% of merchandise selling price. Also during the year, customers returned $370,000 in sales for credit, with $204,000 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?

Answer 1

	a. Journal Entries
No	Accounts	Debit	Credit
1	Refund Liability	$        204,000
	Accounts Receivable		$        204,000
2	Inventory (204000*70%)	$        142,800
	Inventory Estimated Return		$        142,800
3	Sales Return (370000-204000)	$        166,000
	Accounts Receivable		$        166,000
4	Inventory	$        116,200
	Cost of Goods Sold		$        116,200
5	Sales Return [(12800000*3%)-166000-(390000-204000)	$          32,000
	Refund Liability		$          32,000
6	Inventory Estimated Returns (32000*70%)	$          22,400
	Cost of Goods Sold		$          22,400

b. Year-end refund liability
Beginning Balance	$        390,000
Less Prior Sales Returns	$        204,000
Add Refund Liability created	$          32,000
Ending Balance	$        218,000