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 the entry to record the merchandise returns and the year-end adjusting entry for estimated returns. Note: Record the estimated returns at net amounts. (If no entry is required for a transaction/event, select "No journal entry required" in the first account f

Answer 1

1. Prepare the entry to record the merchandise returns and the year-end adjusting entry for estimated returns.

to record returns from last year's sales:

Dr Refund liability 250,000

Cr Accounts receivable 250,000

Dr Inventory ($250,000 x 65%) 162,500

Cr Cost of goods sold 162,500

to record return liability for current year's sales:

Dr Sales returns and allowances ($11,500,000 x 4%) 460,000

Dr Refund liability 460,000

Dr Refund liability 200,000

Cr Accounts receivable 20,000

Dr Inventory ($200,000 x 065%) 130,000

Cr Cost of goods sold 130,000