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26 August, 10:49

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?

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  1. 26 August, 13:15
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    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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