Question

On October 29, Lobo Co. began operations by purchasing razors for resale. The razors have a 90-day warranty. When a razor is returned, the company discards it and mails a new one from the Merchandise Inventory to the customer. The company's cost per new razor is $14 and its retail selling price is $70. The company expects warranty costs to equal 5% of dollar sales. The following transactions occurred.

Nov.		11		Sold 70 razors for $4,900 cash.
		30		Recognized warranty expense related to November sales with an adjusting entry.
Dec.		9		Replaced 14 razors that were returned under the warranty.
		16		Sold 210 razors for $14,700 cash.
		29		Replaced 28 razors that were returned under the warranty.
		31		Recognized warranty expense related to December sales with an adjusting entry.
Jan.		5		Sold 140 razors for $9,800 cash.
		17		Replaced 33 razors that were returned under the warranty.
		31		Recognized warranty expense related to January sales with an adjusting entry.

1. Prepare journal entries to record above transactions and adjustments.

Options to choose from:

• Accounts payable
• Accrued payroll payable
• Bonus payable
• Cash
• Cost of goods sold
• Deferred income tax liability
• Earned services revenue
• Earned ticket revenue
• Employee benefits plan payable
• Employee bonus expense
• Employee fed. inc. taxes payable
• Employee life insurance payable
• Employee medical insurance payable
• Employee union dues payable
• Estimated warranty liability
• Federal unemployment taxes payable
• FICA—Medicare taxes payable
• FICA—Social sec. taxes payable
• Income taxes expense
• Income taxes payable
• Interest expense
• Interest payable
• Merchandise inventory
• Notes payable
• Payroll taxes expense
• Salaries expense
• Salaries payable
• Sales
• Sales salaries expense
• Sales taxes payable
• State unemployment taxes payable
• Unearned services revenue
• Unearned ticket revenue
• Vacation benefits expense
• Vacation benefits payable
• Wages expense
• Warranty expense

Answer 1

1.1
Date	General Journal	Debit	Credit
11-Nov	Cash	4,900
	Sales		4,900
11-Nov	Cost of goods sold	980		=70*14
	Merchandise inventory		980
30-Nov	Warranty expense	245		=4900*5%
	Estimated warranty liability		245
9-Dec	Estimated warranty liability	196		=14*14
	Merchandise inventory		196
16-Dec	Cash	14,700
	Sales		14,700
16-Dec	Cost of goods sold	2,940		=210*14
	Merchandise inventory		2,940
29-Dec	Estimated warranty liability	392		=28*14
	Merchandise inventory		392
31-Dec	Warranty expense	735		=14700*5%
	Estimated warranty liability		735
1.2
Date	General Journal	Debit	Credit
5-Jan	Cash	9,800
	Sales		9,800
5-Jan	Cost of goods sold	1,960		=140*14
	Merchandise inventory		1,960
17-Jan	Estimated warranty liability	462		=33*14
	Merchandise inventory		462
31-Jan	Warranty expense	490		=9800*5%
	Estimated warranty liability		490