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 2021 with a refund liability of $300,000. During 2021, Halifax sold merchandise on account for $11,500,000. Halifax's merchandise costs it 65% of merchandise selling price. Also during the year, customers returned $450,000 in sales for credit, with $250,000 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?

Req. 1:

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

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

Record the actual sales return of merchandise sold during 2021.

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

Record the year-end adjusting entry for estimated returns.

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

Req. 2:

What is the amount of the year-end refund liability after the adjusting entry is recorded?

Answer 1

1. Entries :

Sr. No.	Account	Debit ($)	Credit ($)		Calculations
(a)	Refund Liability Dr.	250000
	To Accounts Receivable		250000
	Inventory Dr.	162500			=250000*65%
	To Inventory-Estimated Returns		162500
	Refund Liability Dr.	50000			=300000 opening-250000 refunded
	To Inventory-Estimated Returns		32500		=50000*65%
	To P&L		17500		=50000-32500
(b)	Sales Return Dr	200000
	To Accounts Receivable		200000
	Inventory Dr	130000			=200000*65%
	To Cost of Goods sold		130000
(c )	Sales Return Dr.	260000			(11500000*4%)-200000
	To Refund Liability		260000
	Inventory-Estimated Returns Dr	169000			=(Refund Liability)*65%
	To Cost of Goods sold		169000		=(260000)*65%

2. Year-end Refund Liability = $260000.

Opening Balance	300000
-Refunded	-250000
-reversed	-50000
+created for current year	260000
Closing Balance	260000