Question

Answer all, and show all work.

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 $440,000. During 2021, Halifax sold merchandise on account for $12,900,000. Halifax's merchandise costs it 65% of merchandise selling price. Also during the year, customers returned $630,000 in sales for credit, with $347,000 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 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

No.	year	General Journal	Debit	Credit
1	2021	Refund liability	347000
		Accounts receivable		347000
2	2021	Inventory (347000*65%)	225550
		Inventory—estimated returns		225550
3	2021	Sales returns (630000-347000)	283000
		Accounts receivable		283000
4	2021	Inventory (283000*65%)	183950
		Cost of goods sold		183950
5	2021	Sales returns	269000
		Refund liability		269000

Part 2

Ending balance in refund liability

$362000

Explanation:

Estimated returns of 2021 sales (12900000*5%)	645000
Less: Actual returns of 2021 sales (630000-347000)	(283000)
Remaining estimated returns of 2021 sales	$362000

Beginning balance in refund liability	440000
Less: Actual returns of pre-2021 sales	(347000)
Plug: adjustment needed:	269000
Ending balance in refund liability (equal to amount estimated as necessary for remaining returns of 2021 sales)	362000