Question

Halifax Manufacturing allows its customers to return merchandise for any reason up to 90 days after dellvery 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 Hability of $340,000. During 2021, Halifax sold merchandise on account for $11,600,000. Halifax's merchandise costs it 75% of merchandise selling price. Also during the year, customers returned $575.000 in sales for credit with $319,000 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. 

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

Answer 1

1. Answer -

Record the actual sales return of merchandise sold prior to 2021.

Year	General Journal	Debit	Credit
2021	Refund liability	$319000
	Accounts receivable		$319000

Record the cost of merchandise returned for goods sold prior to 2021.

Year	General Journal	Debit	Credit
2021	Inventory	$239250
	Inventory-estimated returns		$239250

Calculation:

Merchandise costs it 75% of merchandise selling price

Inventory = $319000 * 75% = $239250

Record the actual sales return of merchandise sold during 2021.

Year	General Journal	Debit	Credit
2021	Sales returns	$256000
	Accounts receivable		$256000

Calculation:

Sales return of merchandise sold during 2021:

= Actual returns - Sales returns of merchandise sold prior to 2021

= $575000 - $3190000

= $256000

Record the cost of merchandise returned for goods sold during 2021.

Year	General Journal	Debit	Credit
2021	Inventory	$192000
	Cost of goods sold		$192000

Calculation:

Merchandise costs it 75% of merchandise selling price

Inventory = $256000 * 75% = $192000

Record the year end adjusting entry for estimated returns.

Year	General Journal	Debit	Credit
2021	Sales returns	$5000
	Refund liability		$5000

Calculation:

Sales returns, estimated to be 5% of sales

= (Sales * Sales returns percentage) - Actual returns

= ($11600000 * 5%) - $575000

= $5000

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

Year	General Journal	Debit	Credit
2021	Inventory-estimated returns	$3750
	Cost of goods sold		$3750

Calculation:

Inventory-estimated returns = $5000 * 75% = $3750

2. Answer -

Ending balance in refund liability

$345000

Here,

The company began 2021 with a refund liability = $340000

And

Sales returns, estimated to be 5% of sales

= (Sales * Sales returns percentage) - Actual returns

= ($11600000 * 5%) - $575000

= $5000

For year 2021 refund liability = $5000

So,

Beginning balance in refund liability = $340000

Add: Year 2021 balance in refund liability = $5000

Ending balance in refund liability = $345000