Question

On October 29, 2017, 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 $20 and its retail selling price is $75 in both 2017 and 2018. The manufacturer has advised the company to expect warranty costs to equal 8% of dollar sales. The following transactions and events occurred.

2017

Nov.		11		Sold 105 razors for $7,875 cash.
		30		Recognized warranty expense related to November sales with an adjusting entry.
Dec.		9		Replaced 15 razors that were returned under the warranty.
		16		Sold 220 razors for $16,500 cash.
		29		Replaced 30 razors that were returned under the warranty.
		31		Recognized warranty expense related to December sales with an adjusting entry.

2018

Jan.		5		Sold 150 razors for $11,250 cash.
		17		Replaced 50 razors that were returned under the warranty.
		31		Recognized warranty expense related to January sales with an adjusting entry.

Problem 9-4A Part 1

1a. Prepare journal entries to record above transactions and adjustments for 2017.
1b. Prepare journal entries to record above transactions and adjustments for 2018.

1a.

• Nov. 11: Record the sales revenue of 105 razors for $7,875 cash.

• Nov. 11: Record the cost of goods sold for 105 razors.

• Nov. 30: Record the estimated warranty expense at 8% of November sales.

• Dec. 09: Record the replacement of 15 razors that were returned under the warranty.

• Dec. 16: Record the sales revenue of 220 razors for $16,500 cash.

• Dec. 16: Record the cost of goods sold for 220 razors.

• Dec. 29: Record the replacement of 30 razors that were returned under the warranty.

• Dec 31: Record the estimated warranty expense at 8% of December sales.

  1b. Prepare journal entries to record above transactions and adjustments for 2018.

• Jan. 05: Record the sales revenue of 150 razors for $11,250 cash.

• Jan. 05: Record the cost of goods sold for 150 razors.

• Jan. 17: Record the replacement of 50 razors that were returned under the warranty.

• Jan. 31: Record the adjusting entry for warranty expense for the month of January 2018.

Answer 1

1a
Date	General Journal	Debit	Credit
11-Nov	Cash	7,875
	Sales		7,875
11-Nov	Cost of goods sold	2100		=105*20
	Merchandise inventory		2,100
30-Nov	Warranty expense	630		=7875*8%
	Estimated warranty liability		630
9-Dec	Estimated warranty liability	300		=15*20
	Merchandise inventory		300
16-Dec	Cash	16,500
	Sales		16,500
16-Dec	Cost of goods sold	4,400		=220*20
	Merchandise inventory		4,400
29-Dec	Estimated warranty liability	600		=30*20
	Merchandise inventory		600
31-Dec	Warranty expense	1,320		=16500*8%
	Estimated warranty liability		1,320
1b
Date	General Journal	Debit	Credit
5-Jan	Cash	11,250
	Sales		11,250
5-Jan	Cost of goods sold	3,000		=150*20
	Merchandise inventory		3,000
17-Jan	Estimated warranty liability	1000		=50*20
	Merchandise inventory		1,000
31-Jan	Warranty expense	900		=11250*8%
	Estimated warranty liability		900