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 Ino cash is collected at the time of salel. The company began 2018 with a refund habity Of $300,000. During 2018 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 2018, and the rest being merchandise sold during 2018. 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 2018 of merchandise that was sold prior to 2018; (b) record actual returns in 2018 of merchandise that was sold during 2018, 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? Complete this question by entering your answers in the tabs below. Required 1 Require entries to (a) record actual returns in 2018 of merchandise that was sold prior to 2013; (b) record actual returns in 2018 of merchandise that was sold during 2018; and (c) adjust the refund liability to its appropriate balance at year end. (If red for a transaction event, select "No journal entry required in the first account field.)

Answer 1

Answer -

1. Answer -

(a)Actual returns in 2018 of merchandise that was sold prior to 2018.

Year	General Journal	Debit	Credit
2018	Refund liability	$250000
	Accounts receivable		$250000
2018	Inventory	$162500
	Inventory-estimated returns		$162500

Calculation:

Cost of goods sold is 65% of sales.

Therefore,

Inventory-estimated returns = $250000 * 65% = $162500

(b) Actual returns in 2018 of merchandise that was sold during 2018.

Year	General Journal	Debit	Credit
2018	Sales returns	$200000
	Accounts receivable		$200000
2018	Inventory	$130000
	Cost of goods sold		$130000

Calculation:

Sales returns of merchandise that was sold during 2018:

= Customers returned during 2018 - Returns of merchandise that was sold prior to 2018

= $450000 - $250000

= $200000

And

Cost of goods sold is 65% of sales.

So, cost of goods sold = $200000 * 65% = $130000

(c) Adjusting refund liability to its appropriate balance at year end.

Year	General Journal	Debit	Credit
2018	Sales returns	$10000
	Refund liability		$10000
2018	Inventory-estimated returns	$6500
	Cost of goods sold		$6500

Calculation:

Estimated sales return is 4% of sales.

Therefore,

Estimated sales return = Sales * 4% = $11500000 * 4% = $460000

Therefore,

Adjusted refund liability balance:

= Estimated sales return - Customers returned during 2018

= $460000 - $450000

= $10000

And

Cost of goods sold is 65% of sales.

So, Inventory-estimated returns = $10000 * 65% = $6500

2. Answer -

The year-end refund liability after the adjusting entry is recorded = $310000

Calculation:

As per given information,

Beginning balance in refund liability = $300000

Adjusted refund liability balance (appropriate balance at year end) = $

Therefore,

Year-end refund liability (Ending balance in refund liability):

= Beginning balance in refund liability + Adjusted refund liability balance

= $300000 + $10000

= $310000