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 $390,000. During 2018, Halifax sold merchandise on account for $12,400,000. Halifax's merchandise costs it 65% of merchandise selling price. Also during the year, customers returned $368,000 in sales for credit, with $203,000 of those being returns of merchandise sold prior to 2018, and the rest being merchandise sold during 2018. Sales returns, estimated to be 3% 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?

I am getting everything besides part C. My math comes out to 4,000 for the difference in estimated and actual but mcgraw hill is saying this is incorrect.

Answer 1

1.

Description	Debit	credit
Sales return	368000
To Account receivable		368000
(Being sales return recorded)
Inventory A/c (368000*65%)	239200
To cost of goods sold		239200
(Being increase in inventory recorded)
Prepare the year end adjusting entry for estimated returns as below
Sales return A/c [3% of 12,400,000]-368000	4000
To provison for sales return A/c		4000
(Being net of provisons recoreded)
Inventory A/c (65% of 4000)	2600
Cost of good sold		2600

2.           

	$
Opening balance in provisons for refund liabilty	390000
Add: provison for the year	372000
Gross provisons at the end of the year	762000
Less: Actual returns	368000
Closing balance of the provisons for sales return	394000