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

Journal Entries

1. Allowance for Sales Return A/c         Dr                   $ 450000

To Customers A/c                                                            $ 450000

                (Being entry passed during the year

               For actual merchandise return before

                Adjusting against allowance for sales

                Return)

2. Profit & Loss A/c                                       Dr                   $ 610000

To Allowance for Sales Return A/c                            $ 610000

                (Being year-end entry passed to adjust

                The allowance for sales return to its

                Appropriate balance.)

Note:

Opening Allowance for sales returns       : $ 300000

Less:      Adjusted during current year return : $ 450000

Add:      Closing Allowance of sales return          : $ 460000

                ($ 11500000*4%)

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Allowance to be made in current year   : $ 610000