Question

The Lemmon Company began selling cars on January 1, 2016. Lemon purchases cars for $10,000 and sell them
for $14,000. Each car Lemon sells comes with a 3 year warranty. Lemon estimates it will cost $1000 per car for
warranty repairs
	In 2016 Lemon sold 5000 cars and spent $230,000 on repairs
	In 2017 Lemon sold 7000 cars and spent $6,000,000 on repairs
At the beginning of 2018, due to improvements in technology, Lemon estimates it will only cost $800 in repairs on each car sold
	In 2018 Lemon sold 8000 cars and spent $6,600,000 on repairs.
REQUIRED:	A) MAKE ALL NECESSARY JOURNAL ENTRIES FOR LEMON IN 2016, 2017 AND 2018 CONNECTED WITH THEIR BUSINESS
	B) WHAT IS LEMON'S INCOME IN 2016 2017 AND 2018 (IGNORE TAXES AND ALL OTHER EXPENSES EXCEPT WARRANTY AND COGS)
	C) WHAT IS THE BALANCE IN LEMON'S WARRANTY LIABILITY ON DECEMBER 31, 2018?

Answer 1

A. In the books of the Lemmon Company:

Year	Account Titles	Debit	Credit
		$	$
2016	Cash	70,000,000
	Sales		70,000,000
2016	Cost of Goods Sold	50,000,000
	Inventory		50,000,000
2016	Warranty Expense ( 5,000 x $ 1,000)	5,000,000
	Estimated Warranty Liability		5,000,000
2016	Estimated Warranty Liability	230,000
	Cash		230,000
2017	Cash	98,000,000
	Sales		98,000,000
2017	Cost of Goods Sold	70,000,000
	Inventory		70,000,000
2017	Warranty Expense ( 7,000 x $ 1,000)	7,000,000
	Estimated Warranty Liability		7,000,000
2017	Estimated Warranty Liability	6,000,000
	Cash		6,000,000
2018	Cash	112,000,000
	Sales		112,000,000
2018	Cost of Goods Sold	80,000,000
	Inventory		80,000,000
2018	Warranty Expense ( 8,000 x $ 800)	6,400,000
	Estimated Warranty Liability		6,400,000
2018	Estimated Warranty Liability	6,600,000
	Cash		6,600,000

B.

	2016	2017	2018
Sales	$ 70,000,000	$ 98,000,000	$ 112,000,000
Less: Cost of Goods Sold	50,000,000	70,000,000	80,000,000
Gross Margin	20,000,000	28,000,000	32,000,000
Less: Warranty Expense	5,000,000	7,000,000	6,400,000
Net Operating Income	15,000,000	21,000,000	25,600,000

C. Balance in Lemon's Warranty Liability on December 31, 2018 = $ 5,570,000.