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's 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.Required:

1. Prepare entries to
(a) record actual returns in 2021 of merchandise that was sold prior to 2021
(b) record actual returns in 2021 of merchandise that was sold during 2021, and
(c) adjust the refund liability to its appropriate balance at year-end.
2. What is the amount of the year-end refund liability after the adjusting entry is recorded?
1a. Record the actual sales return of merchandise sold prior to 2021.
1b. Record the cost of merchandise returned for goods sold prior to 2021.
1c. Record the actual sales return of merchandise sold during 2021.
1d. Record the cost of merchandise returned for goods sold during 2021.
1e. Record the year-end adjusting entry for estimated returns.
1f. Record the adjusting entry for the estimated return of merchandise to inventory.
2. What is the amount of the year-end refund liability after the adjusting entry is recorded?

Answer 1

1. Entries include debits to refund liability, sales returns, cost of goods sold, and credits to inventory for returns of merchandise sold prior to and during 2021, along with adjusting entries for estimated returns.

2. The year-end refund liability is $370,400, reflecting actual returns and adjustments for estimated returns.

Step-by-step explanation:

In 2021, Halifax Manufacturing engaged in credit sales, allowing customers a 90-day window for returns with refunds credited to their accounts. Beginning the year with a refund liability of $300,000, the company recorded credit sales totaling $11,500,000 during the year. The merchandise cost was 65% of the selling price. Customer returns amounted to $450,000, with $250,000 attributed to merchandise sold before 2021. To accurately reflect these transactions, specific entries were made.

For returns of merchandise sold prior to 2021, entry (a) involved a debit to the refund liability ($250,000) and a credit to sales returns ($250,000). Entry (b) addressed the cost of returned goods, with a debit to cost of goods sold ($162,500) and a credit to inventory ($162,500). Returns for merchandise sold during 2021 were handled similarly with entries (c) and (d). Entry (e) adjusted the refund liability for estimated returns by debiting sales returns ($460,000) and crediting the refund liability ($460,000). Lastly, entry (f) managed the estimated return of merchandise to inventory, debiting estimated returns inventory ($19,600) and crediting cost of goods sold ($19,600).

After these entries, the year-end refund liability totaled $370,400, reflecting actual returns and adjusting for estimated returns. This figure provides a more accurate representation of the company's financial position, aiding in decision-making and maintaining transparency in financial reporting. Effective management of refund liabilities is essential for businesses to uphold financial stability and foster positive customer relations.