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 $20 and its retail selling price is $75 in both 2014 and 2015. The manufacturer has advised the company to expect warranty costs to equal 8% of dollar sales. The following transactions and events occurred. 2014 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. 2015 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. 1.1 Prepare journal entries to record above transactions and adjustments for 2014.

Answer 1

Solution:
Transactions and adjustments for 2014.
Date	General Journal	Debit	Credit
Nov 11	Cash	7,875
	Sales		7,875
Nov 11	Cost of goods sold	2,100
	Merchandise inventory		2,100
Notes:	Cost of goods sold = no. of razor sold x cost per razor = 105 x $20 = $2,100
Nov 30	Warranty expense	630
	Estimated warranty liability		630
Notes:	Warranty expense = dollar sales x 8% = $7,875 x 8% = 630
Dec 09	Estimated warranty liability	300
	Merchandise inventory		300
Notes:	Estimated warranty liability = no. of razor replaced x cost per razor = 15 x $20 = $300
Dec 16	Cash	16,500
	Sales		16,500
Dec 16	Cost of goods sold	4,400
	Merchandise inventory		4,400
Notes:	Cost of goods sold = no. of razor sold x cost per razor = 220 x $20 = $4,400
Dec 29	Estimated warranty liability	600
	Merchandise inventory		600
Notes:	Estimated warranty liability = no. of razor replaced x cost per razor = 30x $20 = $600
Dec 31	Warranty expense	1,320
	Estimated warranty liability		1,320
Notes:	Warranty expense = dollar sales x 8% = $16,500 x 8% = $1,320
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