Question

E 7-8 Sales returns L07-4 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 $300,000. During 2021, Halifax sold merchandise on account for $11,500,000. Halifax's merchandise costs it 65% of merchandise selling price. Also during the year, customers returned $450,000 in sales for credit with $250,000 of those being returns of merchandise sold prior to 2021, and the rest being merchandise sold during 2021. Sales returns, estimated to be 4% of sales, are recorded as an adjusting entry at the end of the year. Required: 1. Prepare entries to (a) record actual retums 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

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Halifax Manufacturing
Opening refund liability	300,000.00	A
Less: Returns prior to 2021	250,000.00	B
Balance before adjustment	50,000.00	C=A-B
Cost of goods sold returned prior to 2021	162,500.00	D= B*65%
For 2021
Total Sales	11,500,000.00	E
Estimated Returns @ 4%	460,000.00	F=E*4%
Less: Already returned	200,000.00	G
(450,000- 250,000)
Refund liability to be created for 2021	260,000.00	H=F-G
Less: Balance already in the account	50,000.00	See C
Amount to be adjusted	210,000.00	I=H-C
Cost of goods sold returned in 2021
Sales returns in 2021	200,000.00	See G
Merchandise costs at 65%	130,000.00	J=G*65%
Inventory- estimated returns for 2021
Amount to be adjusted in refund liability	210,000.00	See I
Merchandise costs at 65%	136,500.00	K=I*65%
Answer 1
Journal Entries
Account	Debit $	Credit $
Refund Liability	250,000.00		See Note B
Accounts Receivable		250,000.00
Inventory	162,500.00		See Note D
Inventory- estimated returns		162,500.00
Sales returns	200,000.00		See Note G
Accounts Receivable		200,000.00
Inventory	130,000.00		See Note J
Cost of goods sold		130,000.00
Sales returns	210,000.00		See Note I
Refund liability		210,000.00
Inventory- estimated returns	136,500.00		See Note K
Cost of goods sold		136,500.00
Answer 2- See Note H
The amount of the year end refund liability after the adjustment entry is recorded is- $ 260,000.