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 2021 with a refund liability of $360,000. During 2021, Halifax sold merchandise on account for $12,100,000. Halifax's merchandise costs is 70% of merchandise selling price. Also during the year, customers returned $594,000 in sales for credit, with $328,000 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:

Answer 1

Answer and Explanation:

1.a. The Journal entries are shown below:-

Refund liability Dr, $328,000

         To Account Receivables $328,000

(Being actual sales return of merchandise sold is recorded)

b. Inventory Dr, $229,600 ($328,000 × 70%)

          To Inventory—estimated returns $229,600

(Being cost of merchandise returned for goods is recorded)

c. Sales returns Dr, $266,000 ($594,000 - $328,000)  

         To Accounts receivable $266,000

(Being actual sales return of merchandise is recorded)

d. Inventory Dr, $186,200 ($266,000 × 70%)

        To Cost of Goods Sold $186,200

(Being cost of merchandise returned for goods is recorded)

e. Sales returns Dr, $ 307,000

           To  Refund liability $307,000

(Being year-end adjusting entry for estimated returns is recorded)

f. Inventory Dr, $214,900  ($307,000 × 70%)

      To Cost of Good Sold $214,900

Estimated returns of 2021 sales = 5% × $12,100,000      $ 605,000

Less: Actual returns of 2021 sales                                  ($266,000)  

Remaining estimated returns of 2021 sales                     $ 339,000

2. The computation of amount of the year-end refund liability after the adjusting entry is shown below:-

Beginning balance in refund liability            $360,000  

Less: Actual returns of pre-2021 sales        ($328,000)  

Add: Adjustment needed                               $307,000  

Ending balance                                              $339,000