Question

In: Accounting

Halifax Manufacturing allows its customers to return merchandise for any reason up to 90 days after...

Halifax Manufacturing allows its customers to return merchandise for any reason up to 90 days after dellvery 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 Hability of $340,000. During 2021, Halifax sold merchandise on account for $11,600,000. Halifax's merchandise costs it 75% of merchandise selling price. Also during the year, customers returned $575.000 in sales for credit with $319,000 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? 

Solutions

Expert Solution

1. Answer -

Record the actual sales return of merchandise sold prior to 2021.

Year General Journal Debit Credit
2021 Refund liability $319000
   Accounts receivable $319000

Record the cost of merchandise returned for goods sold prior to 2021.

Year General Journal Debit Credit
2021 Inventory $239250
   Inventory-estimated returns $239250

Calculation:

Merchandise costs it 75% of merchandise selling price

Inventory = $319000 * 75% = $239250

Record the actual sales return of merchandise sold during 2021.

Year General Journal Debit Credit
2021 Sales returns $256000
   Accounts receivable $256000

Calculation:

Sales return of merchandise sold during 2021:

= Actual returns - Sales returns of merchandise sold prior to 2021

= $575000 - $3190000

= $256000

Record the cost of merchandise returned for goods sold during 2021.

Year General Journal Debit Credit
2021 Inventory $192000
   Cost of goods sold $192000

Calculation:

Merchandise costs it 75% of merchandise selling price

Inventory = $256000 * 75% = $192000

Record the year end adjusting entry for estimated returns.

Year General Journal Debit Credit
2021 Sales returns $5000
   Refund liability $5000

Calculation:

Sales returns, estimated to be 5% of sales

= (Sales * Sales returns percentage) - Actual returns

= ($11600000 * 5%) - $575000

= $5000

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

Year General Journal Debit Credit
2021 Inventory-estimated returns $3750
   Cost of goods sold $3750

Calculation:

Inventory-estimated returns = $5000 * 75% = $3750

2. Answer -

Ending balance in refund liability $345000

Here,

The company began 2021 with a refund liability = $340000

And

Sales returns, estimated to be 5% of sales

= (Sales * Sales returns percentage) - Actual returns

= ($11600000 * 5%) - $575000

= $5000

For year 2021 refund liability = $5000

So,

Beginning balance in refund liability = $340000

Add: Year 2021 balance in refund liability = $5000

Ending balance in refund liability = $345000


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