Question

Rusty Hardware makes only cash sales. It began 2021 with a credit balance of $32,000 in the refund liability account. Sales during 2021 were $600,000. Rusty estimates that 6% of all sales will be returned. During 2021, customers returned merchandise for credit of $28,000 to their accounts. What is the balance in the allowance for sales returns account at the end of 2021? a. $32,000. b. $39,000. c. $43,000. d. $40,000.

Answer 1

The balance in Rusty Hardware's allowance for sales returns account at the end of 2021 is calculated by adding the estimated sales returns to the beginning balance and then subtracting the actual returns. It results in a balance of $40,000.

Step-by-step explanation:

The question requires calculating the balance in the allowance for sales returns account at the end of 2021 for Rusty Hardware.

1. First, calculate the estimated returns based on sales:
   Estimated returns = 6% of $600,000 = $36,000. This is how much Rusty Hardware anticipates will be returned based on their sales estimate.
2. Adjust the refund liability account:
   Starting credit balance = $32,000 (given).
   Add estimated returns = $36,000.
   Total = $32,000 + $36,000 = $68,000.
3. Subtract actual returns from the total:
   Actual returns during 2021 = $28,000.
   Ending balance in the allowance for sales returns account = $68,000 - $28,000 = $40,000.

Therefore, the correct answer is d. $40,000.

Answer 2

Ending Balance in allowance for Sales Return = $40,000

Step-by-step explanation:

Ending Balance in allowance for Sales Return = Opening Allowance + Expected Sales Return - Actual Sales Return

Ending Balance in allowance for Sales Return = 32,000 + 600,000*6% - 28,000

Ending Balance in allowance for Sales Return = 32,000 + 36,000 - 28,000

Ending Balance in allowance for Sales Return = $40,000