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

Solution-

Account Titles and Explanation	Debit	Credit
Sales return	$ 460,000
Accounts receivables		$ 460,000
(Being actual sales return recorded)
Inventory ($460,000X 75%)	$ 345,000
Cost of goods sold		$ 345,000
(Being cost of goods sold recorded)
Sales return	$     8,000
Allowance for Sales return		$     8,000
(Being allowance for Sales return adjusted)
[($11,700,000 X 4%) - $460,000]
Inventory - Estimated returns ($8,000X 75%)	$       6,000
Cost of goods sold		$       6,000
(Being cost of goods sold recorded)
Amount of year end allowance for sales return after adjusting entry:
Opening Balance	=	$ 320,000
Add: Estimated Sales return ($11,700,000X 4%)	=	$ 468,000
Less: Actual Sales return	=	$ 460,000
Closing Balance	=	$ 328,000