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

Entry for Sales Return

sales return from previous year sales :-

Sales Return Account Dr. $ 2,66,000

To Customer Account $ 2,66,000

( Being Sales return from Previous Year amount to 2,66,000 )

sales return from Current year sales :-

Sales Return Account Dr. $ 2,15,000

To Customer Account $ 2,15,000

( Being Sales return from current year amount to 215000)

Ending balance of refund Liability :-

Balance b/f 370000

Liability Created during year 488000

Less: Sales return during year for PY (481000)

Balance at the end 3,77,000