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 2018 with an allowance for sales returns of $470,000. During 2018, Halifax sold merchandise on account for $13,200,000. This merchandise cost Halifax $7,920,000 (60% of selling prices). Also during the year, customers returned $524,000 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 an entry to record actual merchandise returns as they occur (not adjusting the allowance for sales returns), and then record a year-end entry to adjust the allowance for sales returns to its appropriate balance.
2. What is the amount of the year-end allowance for sales returns after the adjusting entry is recorded?

Answer 1

1.the following will be required journal entry :

date	accounts	debit	credit
december 31 2018	sales returns	524,000
	........To accounts receivable		524,000
december 31 2018	inventory a/c (524,000*60%)	314,400
	.............To cost of goods sold		314,400

2.allowance for sales returns:

december 31 2018	sales returns	4,000
	..........To allowance for sales returns		4,000
	(amount =(4%*13,200,000-524,000)=>((528,000-524,000)=>4,000
december 31 2018	inventory a/c	2,400
	.............To cost of goods sold		2,400
	(amount = 4,000 allowance *60%)