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 $13 and its retail selling price is $80 in both 2016 and 2017. The manufacturer has advised the company to expect warranty costs to equal 6% of dollar sales. The following transactions and events occurred. 2016 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. 2017 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. 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	Preparation of journal entries to record the above transactions and adjustment for 2016
	Date	Account Title	Debit-$	Credit-$
	11-Nov-16	Cash	6400
		Sales		6400
		to record sales revenue of 80 razors for 6400
	11-Nov-16	Cost of Goods Sold	1040
		Inventory		1040
		to record cost of goods sold for 80 razors for $13 per razor
	30-Nov-16	Warranty Expense	384
		Estimated Warranty Liability		384
		to record warranty expense 6400*6% of Nov sales
	9-Dec-16	Estimated Warranty Liability(16*13)	208
		Inventory		208
		to record the replacement of 16 razors that were replaced under the warranty
	16-Dec-16	Cash	19200
		Sales		19200
		to record sale of 240 razors for 19200 cash
	16-Dec-16	Cost of goods sold	3120
		Inventory		3120
		to record the cost of goods sold for 240 razors at $13 per razor
	29-Dec-16	Estimated warranty liability-32*$13	416
		Inventory		416
		to record the replacement of 32 razors that were replaced under the warranty
	31-Dec-16	Warranty Expense-19200*6%	1152
		Estimated Warranty Liability		1152
		to record warranty expense at 6% December sales
1.2	Preparation of journal entries to record the above transactions and adjustment for 2017
	5-Jan-17	Cash	12800
		Sales		12800
		to record sale of 160 razors for 12800
	5-Jan-17	Cost of Goods Sold	2080
		Inventory		2080
		to record the cost of goods sold for 160 razors at $13 per razor
	17-Jan-17	Estimated warranty liability(37*13)	481
		Inventory		481
		to record replacement of 37 razors that were replaced under the warranty
	31-Jan-17	Warranty Expense 12800*6%	768
		Estimated warranty liability		768
		to record warranty expense at 6%on Jan sales