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 2016 with an allowance for sales returns of $300,000. During 2016, 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.

Required: Please explain the calculations behind these numbers (How does one calculate these numbers from the problem above?)

This is the entry to record the merchandise returns.

Sales Returns* 450,000

Accounts Receivable 450,000

Inventory 292,500

COGS 292,500

This is the entry to record the year-end adjusting entry for estimated returns.

Sales Returns* 10,000

Allowance for Sales Returns** 10,000

Inventory-estimate returns 6,500

COGS 6,500