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 $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?

1 Record the actual sales return of merchandise sold prior to 2018. 

2 Record the cost of merchandise returned for goods sold prior to 2018 

3 Record the actual sales return of merchandise sold during 2018 

4 Record the cost of merchandise returned for goods sold during 2018. 

5 Record the year-end adjusting entry for estimated returns.

6 Record the adjusting entry for the estimated return of merchandise to inventory.

Answer 1

	General Journal	Debit	Credit
1	Sales return and allowance	$250,000
	Accounts receivable		$250,000
	(To record the sales return)
2	Merchandise Inventory	$162,500		($250,000 x 65%)
	Cost of goods sold		$162,500
	(To record cost of goods sold related to sales return)
3	Sales return and allowance	$200,000
	Allowance for sales retuns		$200,000
	(To record the sales return)
4	Merchandise Inventory	$130,000		($200,000 x 65%)
	Cost of goods sold		$130,000
	(To record cost of goods sold related to sales return)
5	Sales return and allowance	$10,000
	Allowance for sales retuns		$10,000
6	Inventory - Estimated returns	$6,500		($10,000 x 65%)
	cost of goods sold		$6,500
	Working
	Estimated returns ($11,500,000 x 4%)	$460,000
	Less: Actual Returns	$450,000
	Remaining Estimated Returns	$10,000