In: Accounting
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?
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