Question

Halifax Manufacturing allows its customers to return merchandise for any reason up to 90 days after...

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 $390,000. During 2021, Halifax sold merchandise on account for $12,400,000. Halifax's merchandise costs is 65% of merchandise selling price. Also during the year, customers returned $368,000 in sales for credit, with $203,000 of those being returns of merchandise sold prior to 2021, and the rest being merchandise sold during 2021. Sales returns, estimated to be 3% 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?

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Answer #1
No Year General Journal Debit Credit
1 2021 Refund liability 203,000
Accounts receivable 203,000
2 2021 Inventory 131,950
Inventory—estimated returns 131,950
(203000*65%)
3 2021 Sales returns 165,000
Accounts receivable 165,000
4 2021 Inventory 107,250
Cost of goods sold 107,250
(165000*3%)
5 2021 Sales returns 20,000
Refund liability 20,000
Ques 2
Ending balance in refund liability 207,000

WORKING

Estimated returns of 2021 sales = 3% × $12,400,000 372,000
Less: Actual returns of 2021 sales (368000-203000) $       (165,000)
Remaining estimated returns of 2021 sales 207,000
Beginning balance in refund liability 390,000
Less: Actual returns of pre-2021 sales $       (203,000)
Plug: adjustment needed: 20,000
Ending balance in refund liability 207,000
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