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 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. a) 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. b) what is the amount of the year-end allowance for sales returns after the adjusting entry is recorded?

A) Journal Entry to record merchandise returns and the year-end adjusting entry for estimated returns are as follows:

Debit Refund Liability $250,000

Credit Accounts Receivable $250,000

Debit Sales Returns $200,000

Credit Accounts Receivable $200,000

Debit Sales Allowances $452,000

Credit Estimated Returns (Refund Liability) $452,000

B) The amount of the year-end Allowance for Sales Returns is $510,000 ($300,000 + $452,000 - $250,000).

Data Analysis:

Jan. 2021 Refund Liability balance = $300,000

During 2021:

Accounts Receivable $11,500,000 Sales Revenue $11,500,000

Cost of Goods Sold $7,475,000 Inventory $74,75,000 (65% of $11,500,000)

Returns from customers = $450,000

Returns for sales before 2021 = $250,000

Returns for sales during 2021 = $200,000 ($450,000 - $250,000)

Sales returns = 4% of sales

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Explanation:

The journal entry is shown below:

(A) Sales return and allowance A/c Dr $450,000

    To Accounts receivable                        $450,000

(being returned goods recorded)

Merchandise inventory A/c Dr $292,500   ($450,000  × 65%)

       To Cost of goods sold                      $292,500

(Being cost of goods sold recorded)

The computation of the estimated return is shown below:

= Sale value of merchandise × return percentage - actual return

= $11,500,000 × 4% - $450,000

= $460,000 - $450,000

= $10,000

(B) Sales return and allowance A/c Dr $10,000

    To Accounts receivable                        $10,000

(being returned goods recorded)

Merchandise inventory A/c Dr $6,500   ($10,000  × 65%)

       To Cost of goods sold                      $6,500

(Being cost of goods sold recorded)

The computation of the year-end allowance for sales returns is shown below:

The amount is same $6,500

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