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 2016 with an allowance for sales returns of $300,000. During 2016, Halifax sold merchandise on account for $11,500,000. This merchandise cost Halifax $7,475,000 (65% of selling prices). Also during the year, customers returned $450,000 in sales for credit. Sales returns, estimated to be 4% of sales, are recorded as an adjusting entry at the end of the year.

Required:

1.	Prepare the entry to record the merchandise returns and the year-end adjusting entry for estimated returns. Note: Record the estimated returns at net amounts. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Total Sale is $11,500,000

Estimated Sales return is 4% of Sales,

Therefore, estimated sales return = $11,500,000 * 4% = $460,000

And actual Sales return during the year is $450,000 which is less than estimated sales returns.

1) So, Entry to record the merchandise returns is,

Dr Cr

Sales Return Account........ Dr $450,000 ------

To Account Receivable A/c ------ $450,000

2) "No Journal entry required" to record the estimated returns at net amount because actual sales return is less than estimated.