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 2020 with an allowance for sales returns of $200,000. During the year, Halifax sold merchandise on account for $12,000,000. This merchandise cost Halifax $8,520,000. Also during the year, customers returned $450,000 in sales for credit. 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.

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

Answer and Explanation:

The Journal entry is shown below:-

1.

a. Sales return Dr,  $450,000

         To Accounts receivable  $450,000

(Being the actual sales returns is recorded)

b. Merchandise inventory Dr, $8,520,000

          To cost of goods sold $8,520,000

(Being the return of merchandise of stock is recorded)

c. Sales return Dr, $30,000

($12,000,000 × 4%) - $450,000

           To Allowance for sales return $30,000

(Being adjustment entry for estimated return is recorded)

d. Inventory estimated returns Dr, $30,000

($12,000,000 × 4%) - $450,000

            To cost of goods sold $30,000

(Being estimated return of merchandise inventory of merchandise to inventory is recorded)

2. The amount of the year-end allowance for sales returns is shown below:-

Beginning balance                             $200,000

Add:

Estimated returns during the year    $480,000

($12,000,000 × 4%)

Less:

Actual returns                                    $450,000

Ending balance                                 $230,000

(a) when insurance is obtained through a reciprocal insurer, the insureds are sharing the risk of loss with other subscribers of that reciprocal.

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