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 2018 with an allowance for sales returns of $300,000. During 2018, Halifax sold merchandise on account for $11,500,000. This merchandise cost Halifax $7.475,000 (65% of selling prices). Also during the year, customers returned $450,000 in sales for credit. Sales returns, estimated to be 4% of sales, are recorded as an adjusting entry at the end of the year. Required: 1. Prepare an entry to record actual merchandise returns as they occur (not adjusting the allowance for sales returns), and then record a year-end entry to adjust the allowance for sales returns to its appropriate balance 2. What is the amount of the year-end allowance for sales returns after the adjusting entry is recorded?

Answer 1

1.

Date	General Journal	Debit	Credit
2018	Sales returns	450000
	Accounts receivable		450000
	(To record sales returns)
	Inventory (65% x $450000)	292500
	Cost of goods sold		292500
	(To record cost of merchandise returned)
	Sales returns	10000
	Allowance for sales returns		10000
	(To record adjustment for sales returns)
	Inventory-estimated returns	6500
	Cost of goods sold (65% x $10000)		6500
	(To record adjustment for cost of estimated sales returns)

Working:

Allowance for sales returns (4% x $11500000)	460000
Less: Actual sales returns	450000
Adjustment required	10000

2. Year-end allowance for sales returns = $300000 + $10000 = $310000