Question

Exercise 7-8 (Algo) Sales returns [LO7-4]

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 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.

Journal Entry 5.) Record the year-end adjusting entry for estimated returns.

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

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

Answer 1

Estimated returns during the year - 5% of sales - 125,00,000*5% = 625000

Actual sales returns = 613000 (though 338000 being returns of merchandise sold prior to 2021 Total sales returns will be deducted from current year sales only. It means rturns related to current year sales = 275000 ( 613000-338000)

Remaining estimated returns = 625000-613000 = 12000

Journal entries

a. Sales returns 613000

To Accounts receivable 613000

b. Inventory 367800

To COGS 367800 (60% merchandise cost = 613000*60%)

c. Sales returns 12000 ( remaining estimated returns i.e, provision)

To allowance for sales returns 12000

d. Inventory 7200

To COGS 7200 (60% of 12000)

Ending balance in allowance account :
Beginning balance in allowance account 400,000
Add: Year-end estimate 625,000
Less: Actual returns 613,000

Ending balance = 412,000