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 $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?

Answer 1

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