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 $360,000. During 2021, Halifax sold merchandise
on account for $12,100,000. Halifax's merchandise costs is 70% of
merchandise selling price. Also during the year, customers returned
$594,000 in sales for credit, with $328,000 of those being returns
of merchandise sold prior to 2021, and the rest being merchandise
sold during 2021. 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 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?
Solution:
1a) Prepare journal entry to record year end adjustong journal entry fpr estimated returns:
Account title and explanation | Debit | Credit |
Sales return | $594,000 | |
Accounts receivable($594,000 - $328,000) | $266,000 | |
Accounts payable | $328,000 | |
(To record sales return) | ||
Merchandise inventory($594,000 * 70%) | $415,800 | |
Cost of goods sold | $415,800 | |
(To record increase in inventory due to sales return) |
Amount of sales in respect of which , the sales return is made, must have been received within 90 days in the previous period itself.Hence, to reverse the sales made, the accounts receivable cannot be credited instead the cash received in the previous year will become payable. Thus, accounts payable is credited.
1b)
Prepare journal entry to record adjusting entry for estimated return of merchandise inventory
Account title and explanation | $Debit | Credit |
Sales returns | $339,000 | |
Allowance for sales return | $339,000 | |
(To record the adjustment in estimated return) | ||
Merchandise inventory(339,00 *70%) | 237,300 | |
Cost of goods sold | 237,300 | |
(To record the adjusting entry for expected increase in inventory) |
Working:
Particulars | Working | |
Sale(During 2021) | a | 12,100,000 |
Estimated sales return | b | 5% |
Estimated return | c=a*b | 605,000 |
Acutal return(from sale of 2021)(594,000 -328,000) | d=c-$328,000 | 266,000 |
Difference | e=c-d | $339,000 |
2)Calculate the amount of the year end refund liability after the adjusting entry , which is as follows:
pariculars | Amount($) |
Balance in allowance for sales return | 360,000 |
Add: Estimated sales return for the current year | 605,000 |
less:Actual sales return(594,000 - $328,000) | 266,000 |
Closing balance in allowance for sales return | 699,000 |