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 2018 with an allowance for sales returns of $420,000. During 2018, Halifax sold merchandise on account for $12,700,000. This merchandise cost Halifax $7,620,000 (60% of selling prices). Also during the year, customers returned $619,000 in sales for credit. Sales returns, estimated to be 5% of sales, are recorded as an adjusting entry at the end of the year.

Required:

1. Prepare an entry to record actual merchandise returns as they occur (not adjusting the allowance for sales returns), and then record a year-end entry to adjust the allowance for sales returns to its appropriate balance.
2. What is the amount of the year-end allowance for sales returns after the adjusting entry is recorded?

REQUIRED 1. Prepare an entry to record actual merchandise returns as they occur (not adjusting the allowance for sales returns), and then record a year-end entry to adjust the allowance for sales returns to its appropriate balance. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

REQUIRED 2:What is the amount of the year-end allowance for sales returns after the adjusting entry is recorded?

Answer 1

Calculation of sales returns = 5% of $12,700,000 =$ 635,000

Actual price of sales returns = 60 % of $ 635,000= $ 381,000

Difference in price = $ 635,000- $ 381,000= $ 254,000

1)

Sales Account $ 635,000 (dr)

Sundry Debtors / Customers Account $ 635,000 (cr)

2)

Sales Returns or Allowances $ 245,000 (dr) ( difference in price)

Trading Profit & Loss Account $ 245,000 (cr)