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

ANSWER

As per the given question,

Sales Returns Sales returns refer to the amount of goods returned by customers due to damage goods. Journal entries: Journal entry records the financial transactions of a business in a journal book. All the business transactions are recorded in the chronological order using the double entry system of accounting. Debit and Credit Rules: Debit will increase the expenses and asset accounts and credit will decrease them. Credit will increase the revenues, liabilities and equity accounts and debit will decrease them.

1. Record the journal entries for the sales returns as shown below:

To record the actual sales return during the year:

Date Account title and Explanation Sales return Accounts receivable (To record the actual sales returns during the year) Ref No Debit Credit $450,000 $450,000

Explanation: Sales return is an expense and its balance is increasing. So, the account is debited. Accounts receivable is an asset and its balance is decreasing. So, the account is credited.

To record the return of merchandise at its cost: Date Account title and Explanation Merchandise Inventory Cost of goods sold ($450,000x65%) (To record the return of merchandise) Ref No Debit Credit S292,500 $292,500 Explanation: Merchandise inventory is an asset and its balance is increasing. So, the account is debited. Cost of goods sold is an expense and its balance is decreasing. So, the account is credited.

Credit To record the adjusting entry for estimated return during the year: Date Account title and Explanation Ref No Debit Sales return [($11.500,000x4%) - $450,000] $10,000 Allowance for sales returns | (To record the adjusting entry for estimated returns) $10,000 Explanation: Sales return is an expense and its balance is increasing. So, the account is debited. Allowance for sales return is a provision/liability and its balance is increasing. So, the account is credited.

To record the return of merchandise at its cost: Credit Ref No Debit $6,500 Date Account title and Explanation Merchandise Inventory Cost of goods sold ($10.000x65%) (To record the estimated return of merchandise) $6,500 Explanation: Merchandise inventory is an asset and its balance is increasing. So, the account is debited. Cost of goods sold is an expense and its balance is decreasing. So, the account is credited.

2. Compute the year-end balance of allowance for sales returns as shown below: Particulars Amount (S) Beginning balance $300,000 Add: Estimated returns ($11,500,000x4%) $460.000 Less: Actual returns $450,000 Ending balance $310,000 Therefore, the amount of year-end allowance for sales returns after the adjusting entry is S310,000