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 $470,000. During 2021, Halifax sold merchandise on account for $13,200,000. Halifax's merchandise costs is 60% of merchandise selling price. Also during the year, customers returned $524,000 in sales for credit, with $289,000 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

Part 1.

(a) record actual returns in 2021 of merchandise that was sold prior to 2021

Inventory = $289,000 X 60% = $ 173,400

Date	Account Particular	Debit	Credit
2021	Refund Liability	$289,000
2021	Accounts Receivables		$289,000

Date	Account Particular	Debit	Credit
2021	Inventory	$ 173,400
2021	Inventory Returns		$ 173,400

(b) record actual returns in 2021 of merchandise that was sold during 2021

Sales Return = $ (524,000 - 289,000) = $ 235,000

Inventory = $ 235,000 X 60% = $ 141,000

Date	Account Particular	Debit	Credit
2021	Sales Return	$ 235,000
2021	Accounts Receivables		$ 235,000

Date	Account Particular	Debit	Credit
2021	Inventory	$ 141,000
2021	Cost of goods sold		$ 141,000

(c) adjust the refund liability to its appropriate balance at year end

Sales Return = $(13,200,000 X 4%) + 289,000 - 235,000 - 470,000) = $ 112,000

Cost of goods sold = $ 112,000 X 60% = $ 67,200

Date	Account Particular	Debit	Credit
2021	Sales Return	$ 112,000
2021	Refund Liability		$ 112,000

Date	Account Particular	Debit	Credit
2021	Inventory Returns	$ 67,200
2021	Cost of goods sold		$ 67,200

Part 2.

Ending Balance
Beginning Balance	$ 470,000
Add : Year end estimate	$ 112,000
Less : Actual Returns	($ 289,000)
Ending Balance in Account	$ 293,000

The year-end refund liability after the adjusting entry = $ 293,000