Question

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 $70 in both 2016 and 2017. The manufacturer has advised the company to expect warranty costs to equal 8% of dollar sales. The following transactions and events occurred.

2016

Nov.		11		Sold 80 razors for $5,600 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 $16,800 cash.
		29		Replaced 32 razors that were returned under the warranty.
		31		Recognized warranty expense related to December sales with an adjusting entry.

2017

Jan.		5		Sold 160 razors for $11,200 cash.
		17		Replaced 37 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.
  

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

Answer 1

1.1
Date	General Journal	Debit	Credit
11-Nov	Cash	5,600
	Sales		5,600
11-Nov	Cost of goods sold	1120		=80*14
	Merchandise inventory		1,120
30-Nov	Warranty expense	448		=5600*8%
	Estimated warranty liability		448
9-Dec	Estimated warranty liability	224		=16*14
	Merchandise inventory		224
16-Dec	Cash	16,800
	Sales		16,800
16-Dec	Cost of goods sold	3,360		=240*14
	Merchandise inventory		3,360
29-Dec	Estimated warranty liability	448		=32*14
	Merchandise inventory		448
31-Dec	Warranty expense	1,344		=16800*8%
	Estimated warranty liability		1,344
1.2
Date	General Journal	Debit	Credit
5-Jan	Cash	11,200
	Sales		11,200
5-Jan	Cost of goods sold	2,240		=160*14
	Merchandise inventory		2,240
17-Jan	Estimated warranty liability	518		=37*14
	Merchandise inventory		518
31-Jan	Warranty expense	896		=11200*8%
	Estimated warranty liability		896