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 2021 with a refund liability of $370,000. During 2021, Halifax sold merchandise on account for $12,200,000. Halifax's merchandise costs is 65% of merchandise selling price. Also during the year, customers returned $481,000 in sales for credit, with $266,000 of those being returns of merchandise sold prior to 2021, and the rest being merchandise sold during 2021. 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 2021 of merchandise that was sold prior to 2021; (b) record actual returns in 2021 of merchandise that was sold during 2021; 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

1) Actual sales return of merchandise sold prior to 2021
Year	General Journal	Debit	Credit
2021	Refund Liability	266000
	Accounts Receivable		266000
2) The cost of merchandise returned for goods sold prior to 2021
Year	General Journal	Debit	Credit
2021	Inventory	172900
	Inventory-estimated returns		172900
3) Actual sales return of merchandise sold during 2021
Year	General Journal	Debit	Credit
2021	Sales returns	215000
	Accounts Receivable		215000
4) The cost of merchandise returned for goods sold during 2021
Year	General Journal	Debit	Credit
2021	Inventory	139750
	Cost of goods sold		139750
5) Year end adjustment entry for estimated returns
Year	General Journal	Debit	Credit
2021	Sales returns	488000
	Refund Liability		488000
6) Adjustment entry for the estimated return of merchandise to inventory
Year	General Journal	Debit	Credit
2021	Inventory-estimated returns	317200
	Cost of goods sold		317200
7) The amount of the year end refund liability after adjusting entry is recorded
2021	Ending balance in refund liability	592000

WORKING
Return is allowed upto 90 days after delivery
All sales are on credit
Op balance of refund liability 2021		370000
Less: Returns belongs to prior year - liability paid		266000
Add: Refund liability estimated for 2021		488000
Total refund liability at the end of 2021		592000
Total sales during 2021		12200000
Merchandise cost is 65% of selling price		7930000
Cost of merchandise returned for goods prior to 2021		172900
Cost of merchandise returned for goods sold during 2021		139750
Merchandise returned during the year		481000
Returns belongs to prior year		266000
Returns belongs to current year		215000
Sales returns estimated for 2021
4% of sales		488000
Cost of goods sold for estimated returns		317200