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 a refund liability of $340,000. During 2018, Halifax sold merchandise on account for $11,900,000. Halifax's merchandise costs it 65% of merchandise selling price. Also during the year, customers returned $580,000 in sales for credit, with $321,000 of those being returns of merchandise sold prior to 2018, and the rest being merchandise sold during 2018. 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 2018 of merchandise that was sold prior to 2018; (b) record actual returns in 2018 of merchandise that was sold during 2018; 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?

1.Record the actual sales return of merchandise sold prior to 2018.

Refund Liability

Accounts Receivable

2. Record the cost of merchandise returned for goods sold prior to 2018.

Inventory

Inventory - Estimate returns

3. Record the actual sales return of merchandise sold during 2018.

Sales Returns

Accounts Receivable

4. Record the cost of merchandise returned for goods sold during 2018.

Inventory

Cost of goods sold

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

Sales Returns

Refund Liability

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

Inventory- Estimated returns

Cost of goods sold

2. Ending Balance of the year end refund liability after adjusting is recorded?

Answer 1

Solution 1.

(a) Recording of Actual retruns in 2018 that was sold prior to 2018
Particulars	DR.	CR.
Refund Liability	3,21,000
Account Receivable		3,21,000

(b) Recording of actual returns in 2018 of merchandise that was sold during 2018
Particulars	DR.	CR.
Sales Returns	2,59,000
Account Receivable		2,59,000

(c) Adjustment of Refund Liability
Particulars	Amount ($)
Opening Balance	3,40,000
Liability Adjusted	3,21,000
Liability Created	5,95,000
Closing Balance	6,14,000

Solution 2.

Amount of the year-end refund liability after the adjusting entry is recorded is $ 614000

1.Record the actual sales return of merchandise sold prior to 2018.
Particulars	DR.	CR.
Refund Liability	3,21,000
Account Receivable		3,21,000

2. Record the cost of merchandise returned for goods sold prior to 2018
Particulars	DR.	CR.
Inventory	3,21,000
Inventory - Estimate returns		3,21,000

3. Record the actual sales return of merchandise sold during 2018.
Particulars	DR.	CR.
Sales Returns	2,59,000
Accounts Receivable		2,59,000

4. Record the cost of merchandise returned for goods sold during 2018.
Particulars	DR.	CR.
Inventory	2,59,000
Cost of goods sold		2,59,000

5. Record the year-end adjusting entry for estimated returns
Particulars	DR.	CR.
Sales Returns	5,95,000
Refund Liability		5,95,000

6. Record the adjusting entry for the estimated return of merchandise to inventory.
Particulars	DR.	CR.
Inventory- Estimated returns	5,95,000
Cost of goods sold		5,95,000

2. Ending Balance of the year end refund liability after adjusting is recorded?

Amount = 6,14000