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? x Answer is complete but not entirely correct. 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.)

Answer 1

Part A

No.	Year	General journal	Debit	Credit
5	2021	Sales returns	339000
		Refund liability		339000
6	2021	Inventory-estimated returns	220350
		Cost of goods sold (339000*65%)		220350

Estimated returns of 2021 sales (5% * $13400000)	670000
Less: Actual returns of 2021 sales	(296000)
Remaining estimated returns of 2021 sales	374000

Cost of goods sold ($200,000 * 65%) = $130,000

Inventory – estimated returns ($250,000 * 65%) = $162,500

Sales returns ($661,000 - $365,000) = $296,000

Beginning balance in refund liability	400000
Less: Actual returns of pre-2021 sales	(365000)
adjustment needed	339000
Ending balance in refund liability	$374000

Part B

Ending balance in refund liability

$374000