Question

Arrow 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 Arrow'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, Arrow sold merchandise on account for $12,000,000. Also during the year, customers returned $520,000 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 5% of sales, are recorded as an adjusting entry at the end of the year. The amount to adjust the refund liability to its appropriate balance at year-end would be:

A. 180,000

B. 220,000

C. 200,000

D. 240,000

Answer 1

Hoover Manufacturing
Opening refund liability	400,000.00	A
Less: Returns prior to 2021	250,000.00	B
Balance before adjustment	150,000.00	C=A-B
For 2021
Total Sales	12,000,000.00	D
Estimated Returns @ 5%	600,000.00	E=D*4%
Less: Already returned	270,000.00	F
(520,000- 250,000)
Refund liability to be created for 2021	330,000.00	G=E-F
Less: Balance already in the account	150,000.00	See C
Amount to be adjusted	180,000.00	H=G-C