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 it 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.

What is the amount of the year-end refund liability after the adjusting entry is recorded?

Answer 1

Answer
Journal Entry
1)
No.	Account title and explanation	Debit	Credit
1)	Sales return and allowances	$     3,70,000
	To, Accounts receivable		$     3,70,000
	(To record actual sales returns )
2)	Merchandise inventory	$     2,59,000
	To, cost of goods sold ($370,000*70%)		$     2,59,000
	(To record the return of merchandise)
3)	Sales return ($12,800,000*3%)-$370,000	$        14,000
	To, Allowance for sales return		$        14,000
	(To record the adjusting entry for estimated returns)
4)	Merchandise inventory ($14,000*70%)	$          9,800
	To, cost of goods sold		$          9,800
	(To record the estimated return of inventory)
2)	The amount of the year end refund liability after the adjusting entry is recorded would be as below:-
	Particulars	Amount
	Beginning balance	$     3,90,000
	Add: Estimated sales return ($12,800,000*3%)	$     3,84,000
	Less: Actual sales return	$     3,70,000
	Closing balance in the allowance for sales return	$     4,04,000

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