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 $300,000. During 2021, Halifax sold merchandise
on account for $11,500,000. Halifax's merchandise costs is 65% of
merchandise selling price. Also during the year, customers returned
$450,000 in sales for credit, with $250,000 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?
| 1 | Ref. | General journal | Debit | Credit | |||||
| a) | Allowance for refund liability | 250000 | |||||||
| Accounts receivable | 250000 | ||||||||
| (Actual sales return of merchandise sold in prior year) | |||||||||
| Inventory | (250000*65%) | 162500 | |||||||
| Inventory-Right of return | 162500 | ||||||||
| (Cost of merchandise returned sold in prior year) | |||||||||
| b) | Sales return | (450000-250000) | 200000 | ||||||
| Accounts receivable | 200000 | ||||||||
| (Actual sales return of merchandise sold in current year) | |||||||||
| Inventory | (200000*65%) | 130000 | |||||||
| Cost of goods sold | 130000 | ||||||||
| (Cost of merchandise returned sold in current year) | |||||||||
| c) | Sales return | (Note;1) | 410000 | ||||||
| Allowance for refund liability | 410000 | ||||||||
| (Adjusting entry for estimated returns) | |||||||||
| Inventory-Right of return | (410000*65%) | 266500 | |||||||
| Cost of goods sold | 266500 | ||||||||
| (Adjusting entry for estimated return of merchandise) | |||||||||
| Note;1 | |||||||||
| $ | |||||||||
| Estimated return for the current year sales | (11500000*4%) | 460000 | |||||||
| Less:allowance for refund liability current balance | (300000-250000) | 50000 | |||||||
| Refund liability to be created | 410000 | ||||||||
| 2 | Refund liability (Allowance for refund liability) year-end balance=$ 460000 | ||||||||
| (300000-250000+410000) | |||||||||
Get Answers For Free
Most questions answered within 1 hours.