In: Accounting
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 $320,000. During 2021, Halifax sold merchandise
on account for $11,700,000. Halifax's merchandise costs is 75% of
merchandise selling price. Also during the year, customers returned
$460,000 in sales for credit, with $255,000 of those being returns
of merchandise sold prior to 2021, and the rest being merchandise
sold during 2021. Sales returns, estimated to be 4% 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?