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 a refund liability of $410,000. During 2018, Halifax sold merchandise on account for $13,500,000. Halifax's merchandise costs it 65% of merchandise selling price. Also during the year, customers returned $532,000 in sales for credit, with $294,000 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?

Journal entry number 5: Record the year-end adjusting entry for estimated returns. (Please explain the calculations)

Journal entry number 6: Record the adjusting entry for the estimated return of merchandise to inventory. (Please explain the calculations)

Credit No 1 Year 2018 General Journal Refund liability Refund liabil Accounts receivable Debit 294,000 294,000 2 2018 191,100 Inventory Inventory-estimated returns 191,100 pok 3 2018 238,000 nt Sales returns Accounts receivable 238,000 ences 2018 154,700 Inventory Cost of goods sold 154,700 2018 Sales returns Refund liability 6 2018 Inventory-estimated returns Cost of goods sold Required 1 Required 2 >

Answer 1

Part A

No.	Year	General journal	Debit	Credit
1	2021	Refund liability	294000
		Accounts receivable		294000
2	2021	Inventory	191100
		Inventory – estimate returns		191100
3	2021	Sales returns	238000
		Accounts receivable		238000
4	2021	Inventory	154700
		Cost of goods sold		154700
5	2021	Sales returns	186000
		Refund liability		186000
6	2021	Inventory-estimated returns	120900
		Cost of goods sold (186000*65%)		120900

Estimated returns of 2021 sales (4% * $13,500,000)	540000
Less: Actual returns of 2021 sales	(238000)
Remaining estimated returns of 2021 sales	302000

Cost of goods sold ($200,000 * 65%) = $130,000

Inventory – estimated returns ($294,000 * 65%) = $162,500

Sales returns ($532,000 - $294,000) = $238,000

Beginning balance in refund liability	410000
Less: Actual returns of pre-2021 sales	(294000)
adjustment needed (balancing figure)	186000
Ending balance in refund liability	$302000

Part B

Ending balance in refund liability

$302000