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 2021 with a refund liability of $360,000. During 2021, Halifax sold merchandise on account for $12,100,000. Halifax's merchandise costs is 70% of merchandise selling price. Also during the year, customers returned $594,000 in sales for credit, with $328,000 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

Solution:

1a) Prepare journal entry to record year end adjustong journal entry fpr estimated returns:

Account title and explanation	Debit	Credit
Sales return	$594,000
Accounts receivable($594,000 - $328,000)		$266,000
Accounts payable		$328,000
(To record sales return)
Merchandise inventory($594,000 * 70%)	$415,800
Cost of goods sold		$415,800
(To record increase in inventory due to sales return)

Amount of sales in respect of which , the sales return is made, must have been received within 90 days in the previous period itself.Hence, to reverse the sales made, the accounts receivable cannot be credited instead the cash received in the previous year will become payable. Thus, accounts payable is credited.

1b)

Prepare journal entry to record adjusting entry for estimated return of merchandise inventory

Account title and explanation	$Debit	Credit
Sales returns	$339,000
Allowance for sales return		$339,000
(To record the adjustment in estimated return)
Merchandise inventory(339,00 *70%)	237,300
Cost of goods sold		237,300
(To record the adjusting entry for expected increase in inventory)

Working:

Particulars	Working
Sale(During 2021)	a	12,100,000
Estimated sales return	b	5%
Estimated return	c=a*b	605,000
Acutal return(from sale of 2021)(594,000 -328,000)	d=c-$328,000	266,000
Difference	e=c-d	$339,000

2)Calculate the amount of the year end refund liability after the adjusting entry , which is as follows:

pariculars	Amount($)
Balance in allowance for sales return	360,000
Add: Estimated sales return for the current year	605,000
less:Actual sales return(594,000 - $328,000)	266,000
Closing balance in allowance for sales return	699,000