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 2018 with a refund liability of $300,000. During 2018, 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 2018, and the rest being merchandise sold during 2018. 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 2018 of merchandise that was sold prior to 2018; (b) record actual returns in 2018 of merchandise that was sold during 2018; 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 Record the actual sales return of merchandise sold prior to 2018.
2 Record the cost of merchandise returned for goods sold prior to 2018
3 Record the actual sales return of merchandise sold during 2018
4 Record the cost of merchandise returned for goods sold during 2018.
5 Record the year-end adjusting entry for estimated returns.
6 Record the adjusting entry for the estimated return of merchandise to inventory.
General Journal | Debit | Credit | ||
1 | Sales return and allowance | $250,000 | ||
Accounts receivable | $250,000 | |||
(To record the sales return) | ||||
2 | Merchandise Inventory | $162,500 | ($250,000 x 65%) | |
Cost of goods sold | $162,500 | |||
(To record cost of goods sold related to sales return) | ||||
3 | Sales return and allowance | $200,000 | ||
Allowance for sales retuns | $200,000 | |||
(To record the sales return) | ||||
4 | Merchandise Inventory | $130,000 | ($200,000 x 65%) | |
Cost of goods sold | $130,000 | |||
(To record cost of goods sold related to sales return) | ||||
5 | Sales return and allowance | $10,000 | ||
Allowance for sales retuns | $10,000 | |||
6 | Inventory - Estimated returns | $6,500 | ($10,000 x 65%) | |
cost of goods sold | $6,500 | |||
Working | ||||
Estimated returns ($11,500,000 x 4%) | $460,000 | |||
Less: Actual Returns | $450,000 | |||
Remaining Estimated Returns | $10,000 | |||