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 $440,000. During 2018, Halifax sold merchandise on account for $12,900,000. Halifax's merchandise costs it 65% of merchandise selling price. Also during the year, customers returned $630,000 in sales for credit, with $347,000 of those being returns of merchandise sold prior to 2018, and the rest being merchandise sold during 2018. Sales returns, estimated to be 5% 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?

Answer 1

entry for sales return
Sales Return A/c			347000
To Accounts Receivables A/c				347000
(BEING SALES RETURN OF THE LAST YEAR RECORDED)
Inventory (Merchandise) A/c			225550
To Cost of Goods Sold A/c				225550
BEING INCREASE IN INVENTORY
Sales Return A/c			283000
To Accounts Receivables A/c				283000
(BEING SALES RETURNS OF THE CURRENT YEAR RECORDED)
Inventory (Merchandise) A/c			183950
To Cost of Goods Sold A/c				183950
BEING INCREASE IN INVENTORY
ADJUSTING ENTRY
DIFFERENCE
estimate=12900000*5%			645000
ACTUALS			630000
			15000
Sales Return A/c	Note 2	15,000
To Provision for Sales Return A/c			15,000
Being net of provisions to actuals is recorded )
Inventory (Estiamted Return) A/c			9750
Cost of Goods Sold A/c (65% of $15,000)				9750
2. The amount of the year-end allowance for sales returns after the adjusting entry is recorded, computed as below:
Descriptions
1) Opening Balance in Provisions for Sales Return						440000
2) Add: Provisions for the year						645000
3) Gross provisions at end of the year 2018. (1 + 2)						1085000
4) Less : Actual Returns						630000
5) Closing Balance of the provisions for Sales Returns (3 less 4)						455000