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 2018 with an allowance for sales returns of $420,000. During 2018, Halifax sold merchandise on account for $12,700,000. This merchandise cost Halifax $7,620,000 (60% of selling prices). Also during the year, customers returned $619,000 in sales for credit. Sales returns, estimated to be 5% of sales, are recorded as an adjusting entry at the end of the year.

Required:

1. Prepare an entry to record actual merchandise returns as they occur (not adjusting the allowance for sales returns), and then record a year-end entry to adjust the allowance for sales returns to its appropriate balance.
2. What is the amount of the year-end allowance for sales returns after the adjusting entry is recorded?

REQUIRED 1. Prepare an entry to record actual merchandise returns as they occur (not adjusting the allowance for sales returns), and then record a year-end entry to adjust the allowance for sales returns to its appropriate balance. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

REQUIRED 2:What is the amount of the year-end allowance for sales returns after the adjusting entry is recorded?

Answer 1

1. Prepare an entry to record actual merchandise returns as they occur (not adjusting the allowance for sales returns), and then record a year-end entry to adjust the allowance for sales returns to its appropriate balance.

Date	Description	LF No.	Debit ($)	Credit ($)
	Sales Return A/c		619,000
	To Accounts Receivables A/c			619,000
	(Being sales return recorded )
	Inventory (Merchandise) A/c	Note No. 1	371,400
	To Cost of Goods Sold A/c			371,400
	(Being increase in inventory recorded)
	Prepare the year-end adjusting entry for estimated returns as below;
	Sales Return A/c	Note 2	16,000
	To Provision for Sales Return A/c			16,000
	Being net of provisions to actuals is recorded )
	Inventory (Estiamted Return) A/c	Note 3	9,600
	Cost of Goods Sold A/c (60% of $16,000)			9,600

Note 1 : Cost to Sales Ratio of merchandise is 60%. Hence 619,000 x 60/100.

Note 2: Diffference between estiamnted returns (5% of $12,700,000 = 635,000) to Actual returns ($ 619,000) is

computed & recorded. $ 635,000 less 619,000 = $16,000.

2. The amount of the year-end allowance for sales returns after the adjusting entry is recorded, computed as below:

Descriptions	Amount
1) Opening Balance in Provisions for Sales Return	$ 4,20,000
2) Add: Provisions for the year	$ 6,35,000
3) Gross provisions at end of the year 2018. (1 + 2)	$ 10,55,000
4) Less : Actual Returns	($ 619,000)
5) Closing Balance of the provisions for Sales Returns (3 less 4)	$ 436,000