Question

Arrow 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 Arrow's sales are for credit (no cash is collected at the time of sale). The company began 2021 with a refund liability of $400,000. During 2021, Arrow sold merchandise on account for $12,000,000. Also during the year, customers returned $520,000 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 5% of sales, are recorded as an adjusting entry at the end of the year. The amount to adjust the refund liability to its appropriate balance at year-end would be:A. 180,000B. 220,000C. 200,000D. 240,000

Answer 1

C. 200,000

Step-by-step explanation:

Sales return are 5% of sales meaning gross sales

therefore sales are $12million * 5% =$600,000

therefore adjustment = Closing Balance - opening balance

$600,000-$400,000

= $200,000