Halifax Manufacturing allows its customers to return merchandise for any reason up to 90 days after delivery and receive a credit to their accounts. Halifax only makes credit sales. The company began 2013 with an allowance for sales returns of $300,000. During 2013, Halifax sold merchandise on account for $11,500,000. This merchandise cost Halifax $7,475,000 (65% of selling prices). 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.
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To calculate the ending balance of the allowance for sales returns, we need to consider the following information:
1. Beginning balance of the allowance for sales returns: $300,000
2. Sales on account during the year: $11,500,000
3. Cost of merchandise sold: $7,475,000 (65% of selling prices)
4. Sales returns during the year: $450,000
5. Estimated sales returns as a percentage of sales: 4%
To calculate the ending balance of the allowance for sales returns, follow these steps:
Step 1: Calculate the estimated sales returns for the year:
Estimated sales returns = Sales on account * Estimated sales returns as a percentage
Estimated sales returns = $11,500,000 * 4% = $460,000
Step 2: Calculate the net sales (sales on account - sales returns):
Net sales = Sales on account - Sales returns
Net sales = $11,500,000 - $450,000 = $11,050,000
Step 3: Calculate the ending balance of the allowance for sales returns:
Ending balance = Beginning balance + Estimated sales returns - Actual sales returns
Ending balance = $300,000 + $460,000 - $450,000 = $310,000
So, the ending balance of the allowance for sales returns is $310,000.
To calculate the ending allowance for sales returns at the end of 2013, you can follow these steps:
Step 1: Calculate the total estimated sales returns for 2013:
Total Sales * Estimated Sales Returns Percentage
$11,500,000 * 4% = $460,000
Step 2: Calculate the current year's sales returns (already recorded):
Sales returns during the year
$450,000
Step 3: Calculate the net sales return for the year:
Total estimated sales returns - Current year's sales returns
$460,000 - $450,000 = $10,000
Step 4: Calculate the adjustment needed for the ending allowance for sales returns:
Ending allowance for sales returns - Beginning allowance for sales returns = Net sales return
Ending allowance for sales returns - $300,000 = $10,000
Step 5: Calculate the ending allowance for sales returns:
Ending allowance for sales returns = Beginning allowance for sales returns + Net sales return
Ending allowance for sales returns = $300,000 + $10,000
Ending allowance for sales returns = $310,000
Therefore, the ending allowance for sales returns at the end of 2013 is $310,000.