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

Required 1)

journal entry A)

dr. refund liability 266,000

 cr. Cash                             266,000

dr. inventory (266,000* 65%)  172,900

  cr. inventory- estimated returns          172,900

journal entry B)

dr. sales return (481,000-266,000)  215,000

  cr. Accounts receivable                                215,000

dr. Inventory (215,000*65%) 139,750

   cr. Cost of goods sold (COGS)        139,750

journal entry C)

step 1) estimated sales revenue@ 4%= 4%*12,200,000= 488,000

step 2) additional sales revenue to be recorded 488,000- (481,000-266,000)-(370,000-266,000)= 169,000

dr. sales return   169,000

  cr. refund liability            169,000

 

dr. inventory-estimated returns (169,000*65%) 109,850

  cr. Cost of goods sold                                                     109,850

Required 2)

step 1) adjusted needed (4%*12,200,000)-(481,000-266,000)-(370,000-266,000)= 169,000

begin: balance in refund liability               370,000

add: adjustment needed                          +169,000

less: actual returns of pre year sales       (266,000)

ending balance in refund liability              273,000  answer