Question

Exercise 7-8 (Algo) Sales returns [LO7-4] 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 $400,000. During 2021. Halifax sold merchandise on account for $13,400,000. Halifax's merchandise costs is 65% of merchandise selling price. Also during the year, customers returned $661,000 in sales for credit, with $365,000 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 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. (If no entry is required for a transaction/event, select "No journal entry required in the first account field.) View transaction list Journal entry worksheet 2 3 4 5 6 Record the actual sales return of merchandise sold prior to 2021.

Answer 1

Answer -

1. Answer -

No.	Year	General Journal	Debit	Credit
1.	2021	Refund liability	$365000
		Accounts receivable		$365000

No.	Year	General Journal	Debit	Credit
2.	2021	Inventory	$237250
		Inventory-estimated returns		$237250

Calculation:

As per given information, merchandise cost is 65% of merchandise selling price.

So,

Inventory-estimated returns = $365000 * 65% = $237250

No.	Year	General Journal	Debit	Credit
3.	2021	Sales returns	$296000
		Accounts receivable		$296000

Calculation:

Actual returns in 2021 of merchandise that was sold during 2021:

Sales returns = Actual sales returns during the year - Returns of merchandise sold prior to 2021

Sales returns = $661000 - $365000

Sales returns = $296000

No.	Year	General Journal	Debit	Credit
4.	2021	Inventory	$192400
		Cost of goods sold		$192400

Calculation:

As per given information, merchandise cost is 65% of merchandise selling price.

So,

Cost of goods sold = $296000 * 65% = $192400

No.	Year	General Journal	Debit	Credit
5.	2021	Sales returns	$9000
		Refund liability		$9000

Calculation:

An estimated sales return is 5% of sales $13400000.

So, estimated sales return = $13400000 * 5% = $670000

But, actual returns during the year = $661000

So,

Refund liability = Estimated sales return - Actual returns during the year

= $670000 - $661000

= $9000

No.	Year	General Journal	Debit	Credit
6.	2021	Inventory-estimated returns	$5850
		Cost of goods sold		$5850

Calculation:

Inventory-estimated returns = $9000 * 65% = $5850

2. Answer -

The year-end refund liability after adjusting entry is recorded = $409000

Calculation:

As per given information,

Beginning balance in refund liability = $400000

Actual sales returns during the year = $661000

Estimated sales return = $670000 (5% of sales $13400000)

Therefore,

Ending balance in refund liability:

= Beginning balance in refund liability + Estimated sales return - Actual sales returns during the year

= $400000 + $670000 - $661000

= $409000