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 $460,000. During 2021, Halifax sold merchandise on account for $13,100,000. Halifax's merchandise costs is 60% of merchandise selling price. Also during the year, customers returned $650,000 in sales for credit, with $358,000 of those being returns of merchandise sold prior to 2021, and the rest being merchandise sold during 2021. Sales returns, estimated to be 5% 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 balanc

Answer 1

(Amount In $)

Year	Particular	Dr	Cr
2021	Refund Liability A/c Dr	358000
	To A/c's Receivable A/c		358000
	(Being Sale return pertainig to previous year set off against opening provision of the same)
	Sale Return and allowance A/c Dr	292000
	To A/c's Receivable A/c		292000
	(Being sales return pertainig to year 2021)
	Inventory A/c Dr	390000
	To Cost of goods Sold A/c		390000
	(Being physical return recorded as invetory at cost) - Note 1
	Sales Return and Allowance A/c Dr	261000
	To Refund Liability A/c		261000
	(Being provision made for sales return) - Note 2

Note 1 - Total Physical return during the year $650000, Profit margine being 40% COGS will be $650000*60% i.e 390000

Note 2 -

Provision for the year 5% of sales ($13,100,000*5%) = $655000

Less Goods already return from current year sale = $292000

Provision to be made for the year = $363000

Less Provision already made ($460000-$358000) = $102000

Additional Provision Required = $261000.