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 $450,000. During 2021, Halifax sold merchandise on account for $13,000,000. Halifax's merchandise costs is 65% of merchandise selling price. Also during the year, customers returned $514,000 in sales for credit, with $283,000 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 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-

Account Titles and Explanation		Debit	Credit
Sales Returns		$514,000.00
Accounts Receivable			$514,000.00
(To record actual sales returns)
Inventory ($514,000*65%)		$334,100.00
Cost of goods sold			$334,100.00
Sales Returns (13,000,000*4%= $520,000) ($520,000-$514,000)		$6,000.00
Allowance for sales returns			$6,000.00
(To record the estimated sales returns)
Estimated Returns ($6,000*65%)		$3,900.00
Cost of goods sold			$3,900.00
(To record cost of goods sold on estimated sales returns)
Determination of the amount of the year-end allowance for sales returns -
Beginning balance	$450,000.00
Estimates Sales Return ($13,000,000*4%)	$520,000.00
Actual Sales Return	$(514,000.00)
Ending balance	$456,000.00