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 is 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. 1.1 Record the actual sales return of merchandise sold prior to 2021. 1.2 Record the cost of merchandise returned for goods sold prior to 2021. 1.3 Record the actual sales return of merchandise sold during 2021. 1.4 Record the cost of merchandise returned for goods sold during 2021. 1.5 Record the year-end adjusting entry for estimated returns. 1.6 Record the adjusting entry for the estimated return of merchandise to inventory.

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

Answer 1

Particulars	Debit	Credit
Sales return	345000
Accounts receivables		154000
Accounts payable		191000
(Being actual sales return recorded)
Inventory ($345000X 70%)	241500
Cost of goods sold		241500
(Being cost of goods sold recorded)
Sales return (354000-154000)	200000
Allowance for Sales return		200000
(Being allowance for Sales return adjusted)
[($11,800,000 X 3%) = 354000,          345000- 191000] =154000
Inventory - Estimated returns (200000*70%)	140000
Cost of goods sold		140000
(Being cost of goods sold recorded)
Amount of year end allowance for sales return after adjusting entry:
Balance in allowance for sales return	=	330000
Add: Estimated Sales return (11,800,000 X 3%)	=	354000
Less: Actual Sales return (345000-191000)	=	154000
Closing Balance	=	530000