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 $330,000. During 2018, Halifax sold merchandise on account for $11,800,000. Halifax's merchandise costs it 70% of merchandise selling price. Also during the year, customers returned $345,000 in sales for credit, with $191,000 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?

Answer 1

Answer -

1. Answer -

(a)

Year	General Journal	Debit	Credit
2018	Refund liability	$191000
	Accounts receivable		$191000
2018	Inventory ($191000 * 70%)	$133700
	Inventory-Estimated returns		$133700

(b)

Year	General Journal	Debit	Credit
2018	Sales returns ($345000 - $191000)	$154000
	Accounts receivable		$154000
2018	Inventory ($154000 * 70%)	$107800
	Cost of goods sold		$107800

(c)

Year	General Journal	Debit	Credit
2018	Sales returns	$9000
	Refund liability		$9000
2018	Inventory-Estimated returns ($9000 * 70%)	$6300
	Cost of goods sold		$6300

Calculation:

Estimated returns = Sales * 3%

Estimated returns = $11800000 * 3% = $354000

So,

Sales returns = Estimated returns - Actual returns

Sales returns = $354000 - $345000 = $9000

2. Answer -

The year-end refund liability after the adjusting entry is recorded = $339000

Beginning balance in refund liability	$330000
Add: Year-end estimated returns	$354000
Less: Actual returns	($345000)
Ending balance in refund liability	$339000