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 $340,000. During 2021, Halifax sold merchandise on account for $11,600,000. Halifax's merchandise costs is 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:
a. Prepare the entry to record the merchandise returns and the year-end adjusting entry for estimated returns.
b. What is the amount of the year-end allowance for sales returns after the adjusting entry is recorded?

Answer 1

Answer:

1.

2021

Dr sales return $575,000

Cr Refund liability $575,000

2021

Dr Allowance for sales return $340,000

Cr Sales return $340,000

2021

Dr sales returns 345,000

Cr Allowance for sales returns 345,00

2021

Dr Inventory estimated return 258,750

Cr Cost of goods sold 258,750

2. $345,000

Explanation:

Halifax Manufacturing

1.

2021

Dr sales return $575,000

Cr Refund liability $575,000

2021

Dr Allowance for sales return $340,000

Cr Sales return $340,000

2021

Dr sales returns 345,000

($11,600,000×5%)-235,000

580,000-235,000

Cr Allowance for sales returns 345,00

2021

Dr Inventory estimated return 258,750

(345,000×75%)

Cr Cost of goods sold 258,750

2.

Beginning balance $340,000

Less adjustment for last year made ($340,000)

Add current year created $580,000

($11,600,000×5%)

Less Adjustment for current year (235,000)

Ending balance in year end allowance $345,000

(575,000-340,000)

=235,000