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 2018 with an allowance for sales returns of $400,000. During 2018, Halifax sold merchandise on account for $12,500,000. This merchandise cost Halifax $8,750,000 (70% of selling prices). Also during the year, customers returned $613,000 in sales for credit. Sales returns, estimated to be 5% of sales, are recorded as an adjusting entry at the end of the year. Required: 1. Prepare an entry to record actual merchandise returns as they occur (not adjusting the allowance for sales returns), and then record a year-end entry to adjust the allowance for sales returns to its appropriate balance. 2. What is the amount of the year-end allowance for sales returns after the adjusting entry is recorded?

Please refer to the below explanations.

Explanation:

A.

Sales return and allowance a/c Dr $613,000

To accounts receivable A/c Cr $613,000

(Being retuned goods that is recorded)

Merchandise inventory A/c Dr $429,100

($613,000 × 70%)

To cost of goods sold A/c Cr $429,100

(Being cost of goods sold that was recorded)

Estimated return is therefore;

= Sale value of merchandise × return percentage - actual return

= $12,500,000 × 5% - $613,000

= $625,000 - $613,000

= $12,000

B.

Sales return and allowance A/c Dr $12,000

To accounts receivable A/c Cr $12,000

(Being returned goods that were recorded)

Merchandise inventory A/c Dr $8,400

($12,000 × 70%)

To cost of goods sold A/c Cr $8,400

(Being cost of goods sold that were recorded)

Therefore, the computation for the year end allowance for sales return is same as $8,400.

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