Question

To support himself while attending Exit 245 University, Duke Dog started a bike shop. During year 1, Duke Dog purchased inventory (bikes) for $30,000 cash and had sales of $50,000 in cash. Duke provided his customers a two year warranty against defects in parts and labor. Based on industry standards, he estimated warranty claims would amount to 10% of sales. During the year he paid $1,200 to replace a defective carbon fiber bicycle frame.   

REQUIRED:

1. Prepare the journal entries in year 1 to record:
   1. Purchase of inventory (perpetual inventory system.)
   2. Record sales
   3. Record cost of goods sold (perpetual inventory system).
   4. Warranty expense.
   5. Payment for repairs.

Answer 1

Journal entries
Date	Accounts	Debit	Credit
a	inventory	$30,000
	Cash A/c		$30,000
	(to record purchase of inventory)
b	Cash A/c	$50,000
	Sales		$50,000
	(To record sales)
c	Cost of Goods sold	$50,000
	inventory		$50,000
	(to record cost of goods sold)
d	Warrenty expenses	$5,000
	warrenty liablity		$5,000
	(to record warrenty expense)
e	Warrenty liablity	$1,200
	Inventory		$1,200
	( to record warrenty paid)