Question

In: Accounting

Halifax Manufacturing allows its customers to return merchandise for any reason up to 90 days after...

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 $320,000. During 2021, Halifax sold merchandise on account for $11,700,000. Halifax's merchandise costs is 75% of merchandise selling price. Also during the year, customers returned $460,000 in sales for credit, with $255,000 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?

Solutions

Expert Solution

Part 1
Allowance for sales return $255,000
     Accounts Receivable $255,000
Inventory $191,250
     Inventory-Estimated Return $191,250
$255,000*75%
(b) record actual returns in 2021 of merchandise that was sold during 2021
Sales Return $205,000
     Accounts Receivable $205,000
$460,000-$255,000
Inventory $153,750
     Cost of goods sold $153,750
$205,000*75%
Sales Return $198,000
     Refund Liability $198,000
[($11,700,000*4%) - $205,000] - [$320,000 - $255,000)
Inventory-Estimated Returns $148,500
     Cost of goods sold $148,500
$8,000*75%
Part 2
Add: Estimated Return of merchandise sold in 2021 $468,000
Less: Actual return of merchandise sold during 2021 $-205,000
Ending balance in Refund Liability $263,000

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