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 $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?

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