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 $460,000. During 2021, Halifax sold merchandise on account for $13,100,000. Halifax's merchandise costs is 60% of merchandise selling price. Also during the year, customers returned $650,000 in sales for credit, with $358,000 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?

Answer 1

Account Titles	Debit	Credit
Sales returns and allowances	$              650,000
Accounts Receivable		$         650,000
Inventory	$              390,000
Cost of Goods Sold		$         390,000
Sales returns and allowances	$                  5,000
Allowance for Returns		$             5,000
Inventory	$                  3,000
Cost of Goods Sold		$             3,000

Ending Balance in allowance Account
Beginning Balance	$              460,000
Add : Year end estimate	$              655,000
Less : Actual Returns	$              650,000
Ending Balance in allowance Account	$              465,000