Question

On October 29, 2014, Lobo Co. began operations by purchasing razors for resale. Lobo uses the perpetual inventory method. The razors have a 90-day warranty that requires the company to replace any nonworking razor. When a razor is returned, the company discards it and mails a new one from Merchandise Inventory to the customer. The company's cost per new razor is $13 and its retail selling price is $80 in both 2014 and 2015. The manufacturer has advised the company to expect warranty costs to equal 7% of dollar sales. The following transactions and events occurred.

   

2014

   

Nov.	11	Sold 80 razors for $6,400 cash.
	30	Recognized warranty expense related to November sales with an adjusting entry.
Dec.	9	Replaced 16 razors that were returned under the warranty.
	16	Sold 240 razors for $19,200 cash.
	29	Replaced 32 razors that were returned under the warranty.
	31	Recognized warranty expense related to December sales with an adjusting entry.

   

2015

   

Jan.	5	Sold 160 razors for $12,800 cash.
	17	Replaced 37 razors that were returned under the warranty.
	31	Recognized warranty expense related to January sales with an adjusting entry.

Answer 1

JOURNAL ENTRY
Date	Particulars	Debit	Credit
2014
11-Nov	cash A/c	$      6,400
	To Sales		$      6,400
11-Nov	Cost of goods sold (13*80)	$      1,040
	To Merchandise Inventory		$      1,040
30-Nov	warranty expenses (6400*7%)	$         448
	To estimated warranty Liability		$         448
9-Dec	Estimated Warranty Liability (16*13)	$         208
	To Merchandise Inventory		$         208
16-Dec	Cash A/c	$    19,200
	to Sales		$    19,200
16-Dec	Cost of goods sold (240*13)	$      3,120
	To Merchandise Inventory		$      3,120
29-Dec	Estimated Warranty Liability (32*13)	$              416
	To Merchandise Inventory		$              416
31-Dec	warranty expenses (19200*7%)	$          1,344
	To estimated warranty Liability		$          1,344
2015
5-Jan	Cash A/c	$        12,800
	to Sales		$        12,800
5-Jan	Cost of goods sold (160*13)	$          2,080
	To Merchandise Inventory		$          2,080
17-Jan	Estimated Warranty Liability (37*13)	$              481
	To Merchandise Inventory		$              481
31-Jan	warranty expenses (12800*7%)	$              896
	To estimated warranty Liability		$              896