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 $320,000. During 2021, Halifax sold merchandise on account for $11,700,000. Halifax's merchandise costs is 75% of merchandise selling price. Also during the year, customers returned $460,000 in sales for credit, with $255,000 of those being returns of merchandise sold prior to 2021, and the rest being merchandise sold during 2021. Sales returns, estimated to be 4% 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

Answer:

1.	Journal Entries
	Account Title & Explanation	Debit ($)	Credit ($)
	Sales Returns	460,000
	Accounts Receivable		460,000
	Merchandise Inventory (460,000 *60%)	276,000
	Cost of Goods Sold		276,000

2.allowance for sales returns:

december 31 2021	sales returns	8,000
	..........To allowance for sales returns		8,000
	(amount =(4%*11,700,000-460,000)=)=>8,000
december 31 2021	inventory a/c	4,800
	.............To cost of goods sold		4,800
	(amount =8,000 allowance *60%)