Question

Metlock, Inc. sells products that carry a two year warranty. Any defective product is replaced with a new item taken from inventory. Management believes that this is the most cost effective way to deal with any defects or customer complaints. Estimates of claims are expected to be 2 out of every 100 units sold. The units sell for $32 and cost $22. All sales are on account, and the 13% HST is not included in the selling price.

Also, in the last year, Metlock began selling gift cards in denominations of $59 and $29. Cash and/or credit cards were accepted for payment. This practice was started when Metlock’s CFO learned that not all of the gift cards are actually redeemed. HST is recorded at the time of redemption.

Metlock has a calendar year end and uses a perpetual inventory system.

Transactions for the current fiscal year include the following:

1.		Sales of 4,080 units.
2.		Return of 264 units not defective, returned to inventory.
3.		Replaced 42 units under warranty.
4.		Sold $49,540 of gift cards.
		Redeemed $14,730 of gift cards; COGS was $8,880. (Hint: The redeemed gift cards were used to pay for merchandise as well as the HST.) Prepare journal entries for the above transactions. (To record sales and sales tax payable) (To record cost of goods sold) (To record sales returns and sales taxes) (To record cost of goods sold) (To record honouring of actual warranty cost) (To record sale of gift cards) (To record redemption of gift cards) (To record cost of goods sold) Prepare any adjusting journal entries required on December 31, the end of the fiscal year. (Hint: Assume 9% of the gift cards will never be redeemed.) (To accrue warranty costs) (To record redemption) Prepare the journal entry to record payment of the HST. Account Titles and Explanation Debit Credit What is the ending balance in the Warranty Liability account on December 31 (after adjustments)? Ending balance in the Warranty Liability of $

Answer 1