Question

Halifax Manufacturing allows its customers to return merchandise for any reason up to 90 days after...

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 $380,000. During 2021, Halifax sold merchandise on account for $12,300,000. Halifax's merchandise costs is 70% of merchandise selling price. Also during the year, customers returned $603,000 in sales for credit, with $333,000 of those being returns of merchandise sold prior to 2021, and the rest being merchandise sold during 2021. Sales returns, estimated to be 5% 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?

Homework Answers

Answer #1
1)
Date Particulars Debit ($) Credit ($)
Sales return 603000
     Accounts receivable (603-333000) 270000
     Accounts payable 333000
(To record sales return
Marchnaide inventory (603000*70%) 422100
     Cost of goods sold 422100
(To record increase in inventory due to sales returns)
Sales returns (12300000*5%)= 615000-270000 345000
     Allowance for sales return 345000
(to record the adjustment in estimated retun)
Merchandise inventory (345000*70%) 241500
     Cost of goods sold 241500
(To record the adjusting entry for the expected increase in inventory)
2)
Particulars Amount ($)
Balance in the allowance for sales return 380000
Add: Estimated sales return for the current year 615000
Less: Actual sales return (603000-333000) 270000
Closing balance in the allowance for sales return 725000
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