Question

9-4

On October 29, 2016, 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 $14 and its retail selling price is $90 in both 2016 and 2017. The manufacturer has advised the company to expect warranty costs to equal 9% of dollar sales. The following transactions and events occurred.

2016

Nov.		11		Sold 50 razors for $4,500 cash.
		30		Recognized warranty expense related to November sales with an adjusting entry.
Dec.		9		Replaced 10 razors that were returned under the warranty.
		16		Sold 150 razors for $13,500 cash.
		29		Replaced 20 razors that were returned under the warranty.
		31		Recognized warranty expense related to December sales with an adjusting entry.

2017

Jan.		5		Sold 100 razors for $9,000 cash.
		17		Replaced 25 razors that were returned under the warranty.
		31		Recognized warranty expense related to January sales with an adjusting entry.

1.1 Prepare journal entries to record above transactions and adjustments for 2016.
  

• 1Record the sales revenue of 50 razors for $4,500 cash.

• 2Record the cost of goods sold for 50 razors.

• 3Record the estimated warranty expense at 9% of November sales.

• 4Record the replacement of 10 razors that were returned under the warranty.

• 5Record the sales revenue of 150 razors for $13,500 cash.

• 6Record the cost of goods sold for 150 razors.

• 7Record the replacement of 20 razors that were returned under the warranty.

• 8Record the estimated warranty expense at 9% of December sales.

• 1Record the sales revenue of 100 razors for $9,000 cash.

• 2Record the cost of goods sold for 100 razors.

• 3Record the replacement of 25 razors that were returned under the warranty.

• 4Record the adjusting entry for warranty expense for the month of January 2017.

Answer 1

Solution:-

1.1 Prepare journal entries to record above transactions and adjustments for 2016:-

Sr. No.	Date	General Journal	Debit	Credit
1	Nov 11	Cash	4,500
		Sales		4,500
2	Nov 11	Cost of goods sold	700
		Merchandise Inventory		700
3	Nov 30	Warranty expense	405
		Estimated warranty liability		405
4	Dec 09	Estimated warranty liability	140
		Merchandise Inventory		140
5	Dec 16	Cash	13,500
		Sales		13,500
6	Dec 16	Cost of goods sold	2,100
		Merchandise inventory		2,100
7	Dec 29	Estimated warranty liability	280
		Merchandise inventory		280
8	Dec 31	Warranty expense	1,215
		Estimated warranty liability		1,215

Explanation:-

Nov. 11, 2016

To record cost of November 11 sale (50 × $14) = $700

Nov. 30, 2016

To record razor warranty expense and liability at 9% of selling price = $405

Dec. 9, 2016

To record cost of razor warranty replacements (10 × $14) = $140

Dec. 16, 2016

To record cost of December 16 sale (150 × $14) = $2,100

Dec. 29, 2016

To record cost of razor warranty replacements (20 × $14) = $280

Dec. 31, 2014

To record razor warranty expense and liability at 9% of selling price = $1,215

1.2 Prepare journal entries to record above transactions and adjustments for 2017:-

Sr. No.	Date	General Journal	Debit	Credit
1	Jan 05	Cash	9,000
		Sales		9,000
2	Jan 05	Cost of goods sold	1,400
		Merchandise Inventory		1,400
3	Nov 30	Warranty expense	350
		Estimated warranty liability		350
4	Dec 09	Estimated warranty liability	810
		Merchandise Inventory		810

Jan. 5, 2017

To record cost of January 5 sale (100 × $14) = $1,400

Jan. 17, 2017

To record cost of razor warranty replacements (25 × $14) = $350

Jan. 31, 2017

To record razor warranty expense and liability at 9% of selling price = $810