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 $400,000. During 2021, Halifax sold merchandise on account for $12,500,000. Halifax's merchandise costs is 70% of merchandise selling price. Also during the year, customers returned $613,000 in sales for credit, with $338,000 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?

• Record the actual sales return of merchandise sold prior to 2021.

• Record the cost of merchandise returned for goods sold prior to 2021.

• Record the actual sales return of merchandise sold during 2021.

• Record the cost of merchandise returned for goods sold during 2021.

• Record the year-end adjusting entry for estimated returns.

• Record the adjusting entry for the estimated return of merchandise to inventory.

No	Year	General Journal	Debit	Credit
1	2021	Refund liability
		Accounts receivable
2	2021	Inventory
		Inventory—estimated returns
3	2021	Sales returns
		Accounts receivable
4	2021	Inventory
		Cost of goods sold
5	2021	Sales returns
		Refund liability
6	2021	Inventory—estimated returns
		Cost of goods sold

What is the amount of the year-end refund liability after the adjusting entry is recorded?

Ending balance in refund liability

Answer 1