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 an allowance for sales returns of $300,000. During 2018, Halifax sold merchandise on account for $11,500,000. This merchandise cost Halifax $7,475,000 (65% of selling prices). Also during the year, customers returned $450,000 in sales for credit. Sales returns, estimated to be 4% of sales, are recorded as an adjusting entry at the end of the year. 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.

Answer 1

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Halifax Manufacturing
Opening refund liability	300,000.00	A
Less: Returns prior to 2018	250,000.00	B
Balance before adjustment	50,000.00	C=A-B
Cost of goods sold returned prior to 2018	162,500.00	D= B*65%
For 2018
Total Sales	11,500,000.00	E
Estimated Returns @ 4%	460,000.00	F=E*4%
Less: Already returned	200,000.00	G
(450,000- 250,000)
Refund liability to be created for 2018	260,000.00	H=F-G
Less: Balance already in the account	50,000.00	See C
Amount to be adjusted	210,000.00	I=H-C
Cost of goods sold returned in 2018
Sales returns in 2018	200,000.00	See G
Merchandise costs at 65%	130,000.00	J=G*65%
Inventory- estimated returns for 2018
Amount to be adjusted in refund liability	210,000.00	See I
Merchandise costs at 65%	136,500.00	K=I*65%
Answer 1
Journal Entries
Account	Debit $	Credit $
Refund Liability	250,000.00		See Note B
Accounts Receivable		250,000.00
Inventory	162,500.00		See Note D
Inventory- estimated returns		162,500.00
Sales returns	200,000.00		See Note G
Accounts Receivable		200,000.00
Inventory	130,000.00		See Note J
Cost of goods sold		130,000.00
Sales returns	210,000.00		See Note I
Refund liability		210,000.00
Inventory- estimated returns	136,500.00		See Note K
Cost of goods sold		136,500.00
Answer 2- See Note H
The amount of the year end refund liability after the adjustment entry is recorded is- $ 260,000.