Question

Exercise 7-8 Sales returns (L07-4) 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. Required: 1. Prepare an entry to record actual merchandise returns as they occur (not adjusting the allowance for sales returns), and then record a year-end entry to adjust the allowance for sales returns to its appropriate balance. 2. What is the amount of the year-end allowance for sales returns after the adjusting entry is recorded?
Help with journal entries? Prior to 2021

Answer 1

Journal entry for recording of sales

Allowance for doubtful debts opening balance - $300,000.00

current year returns $450,000

after adjusting against the allowance of $300,000.00 the additional sales returns is $150,000.00

Date	Account Title	Debit $	Credit $
	Sales Returns	150,000.00
	Accounts receivable		150,000.00
	Recording of sales returns at selling price
	Inventory	97,500.00
	Cost of good sold		97,500.00
	Cost at 65% of selling price ($150,000.00 * 65/100
Dec 31	Sales Returns	442,000.00
	Allowance for sales returns		442,000.00
	allowance for sales returns at 4% of net sales

Calculation for allowance for sales returns

credit sales for the period = $11,500,000.00

Balance in allowance for sales returns after accounting for current year sales returns is zero

Net sales =$11,500,000.00 - $450,000.00 = $11, 050,000.00

Allowance at 4% of net sales = $11,050,000.00 *4/100 = $442,000.00