Question

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 $340,000. During 2021, Halifax sold merchandise on account for $11,600,000. Halifax's merchandise costs it 75% of merchandise selling price. Also during the year, customers returned $575,000 in sales for credit, with $319,000 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

ANSWER

Halifax Manufacturing
Opening refund liability	340,000	A
Less: Returns prior to 2021	319,000	B
Balance before adjustment	21,000	C=A-B
Cost of goods sold returned prior to 2021	239,250	D= B*75%
For 2021
Total Sales	11,600,000	E
Estimated Returns @ 5%	580,000	F=E*5%
Less: Already returned	256,000	G
(575,000 - 319,000 )
Refund liability to be created for 2021	324,000	H=F-G
Less: Balance already in the account	21,000	See C
Amount to be adjusted	303,000	I=H-C
Cost of goods sold returned in 2021
Sales returns in 2021	256,000	See G
Merchandise costs at 75%	192,000	J=G*75%
Inventory- estimated returns for 2021
Amount to be adjusted in refund liability	303,000	See I
Merchandise costs at 75%	227,250	K=I*75%
Answer 1
Journal Entries
Account	Debit $	Credit $
Refund Liability	319,000		See Note B
Accounts Receivable		319,000
Inventory	239,250		See Note D
Inventory- estimated returns		239,250
Sales returns	256,000		See Note G
Accounts Receivable		256,000
Inventory	192,000		See Note J
Cost of goods sold		192,000
Sales returns	303,000		See Note I
Refund liability		303,000
Inventory- estimated returns	227,250		See Note K
Cost of goods sold		227,250
Answer 2- See Note H
The amount of the year end refund liability after the adjustment entry is recorded is- $ 324,000.

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