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 $300,000. During 2021, Halifax sold merchandise on account for $11,500,000. Halifax merchandise costs it 65% of merchandise selling price. Also during the year, customers returned $450,000 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 4% of sales, are recorded as an adjusting entry at the end of the year. A) 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. B) What is the amount of the year-end allowance for sales returns after the adjusting entry is recorded?

Answer 1

Answer:

Explanation:

The journal entry is shown below:

(A) Sales return and allowance A/c Dr $450,000

    To Accounts receivable                        $450,000

(being returned goods recorded)

Merchandise inventory A/c Dr $292,500   ($450,000  × 65%)

       To Cost of goods sold                      $292,500

(Being cost of goods sold recorded)

The computation of the estimated return is shown below:

= Sale value of merchandise × return percentage - actual return

= $11,500,000 × 4% - $450,000

= $460,000 - $450,000

= $10,000

(B) Sales return and allowance A/c Dr $10,000

    To Accounts receivable                        $10,000

(being returned goods recorded)

Merchandise inventory A/c Dr $6,500   ($10,000  × 65%)

       To Cost of goods sold                      $6,500

(Being cost of goods sold recorded)

The computation of the year-end allowance for sales returns is shown below:

The amount is same $6,500