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 $380,000. During 2018, Halifax sold merchandise on account for $12,300,000. This merchandise cost Halifax $8,610,000 (70% of selling prices). Also during the year, customers returned $603,000 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?

Journal Entry Worksheet

1.Record the actual sales returns.

2.Record the return of merchandise to stock.

3.Record the year-end adjusting entry for estimated returns.

4.Record the adjusting entry for the estimated return of merchandise to inventory.

Answer 1

1. Journal entry for sales return

                                      Sales Return A/c Dr.                 603000

                                        To Debtor A/c Dr. 603000

   (Sales Return recorded )

Adjustment against sales return Allowance at the year end

   Sales Return Allowances A/c Dr.    441500

   Trading A/c    Dr. 161500

                                       To Sales Return A/c Dr.                                         603000

2.    Amount of Balance remain Sales return allowance after adjusting entry

Allowance recorded at the begning is    $380000

Made during the year    $61500 (1230000X.05)

Actual Sales return $603000

Balance left after adjustment is = nil