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 2016 with an allowance for sales returns of $490,000. During 2016, Halifax sold merchandise on account for $13,400,000. This merchandise cost Halifax $8,710,000 (65% of selling prices). Also during the year, customers returned $661,000 in sales for credit. Sales returns, estimated to be 5% of sales, are recorded as an adjusting entry at the end of the year. Required: 1. Prepare the entry to record the merchandise returns and the year-end adjusting entry for estimated returns. Note: Record the estimated returns at net amounts. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 2. What is the amount of the year-end allowance for sales returns after the adjusting entry is recorded?

Answer 1

Sales: Sales represent the amount of revenue earned by an entity by selling goods (or by rendering services). The activity representing the sales are the core activities undertaken by an entity to earn revenue which are also mentioned in the memorandum while registering the business with the government authorities.

The sale can be made either against cash or on account depending upon the relationship and term of contract between the customer and the seller.

Concepts and reason

Journal entries: Journal entry is the first step to record any transaction in the books of account. Recording financial transaction in a journal book in the form of an entry is known as journalizing.

Journal entries are prepared by using three rules of accounting standards, they are as follows:

The rule is: Debit the receiver and Credit the giver.

The rule is: Debit what comes in and Credit what goes out.

The rule is: Debit the Expense and Credit the Income.

Sales Return: Sales return represents the amount of goods returned by the customer (at the selling price). A return can be due various reasons like receiving of defective products by the customers etc. when the goods are returned by the customers, the accounts receivable accounts are credited (if the original sale was made on account) or a debit note is issued to the customers (where the original sale was made in cash).

In case of rendering of services, revenue is recorded only when the services are actually provided to the customers (as per the revenue recognition concept); and, services, once provided cannot be undone. Hence there will not be any recording of sales return.

Allowance for sales return: Entities often make estimation for the amount of goods that would be returned by the customers. The estimation could be based on the past experience or as a percentage of total sales etc. Since the sales return is calculated on estimation basis, accounts receivable account is not credited (nor a debit note is issued); instead, allowance for sales return account is credited to record such estimation.

Fundamentals

1.

Prepare journal entries to record the merchandise returns as provided below:

Prepare journal to record the year end adjusting entry for estimated returns as provided below:

Working note:

1. Calculation of Allowance to be recorded for sales return

2.

Calculate the amount in the allowance for sales return account at the end of the year as provided below:

Thus, the amount of year end allowance for sales returns after recording the adjusting entry is $499,000.

Ans: Part 1.1

Part 1.2

Part 2

Year-end allowance for sales returns is $499,000.