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

1	Ref.	General journal					Debit	Credit
	a)	Allowance for refund liability					250000
		Accounts receivable						250000
		(Actual sales return of merchandise sold in prior year)
		Inventory			(250000*65%)		162500
		Inventory-Right of return						162500
		(Cost of merchandise returned sold in prior year)
	b)	Sales return			(450000-250000)		200000
		Accounts receivable						200000
		(Actual sales return of merchandise sold in current year)
		Inventory			(200000*65%)		130000
		Cost of goods sold						130000
		(Cost of merchandise returned sold in current year)
	c)	Sales return				(Note;1)	410000
		Allowance for refund liability						410000
		(Adjusting entry for estimated returns)
		Inventory-Right of return			(410000*65%)		266500
		Cost of goods sold						266500
		(Adjusting entry for estimated return of merchandise)
	Note;1
							$
	Estimated return for the current year sales					(11500000*4%)	460000
	Less:allowance for refund liability current balance					(300000-250000)	50000
	Refund liabilty to be created						410000
2	Refund liability (Allowance for refund liability) year-end balance=$ 460000
	(300000-250000+410000)