On October 29, 2014, Lobo Co. began operations by purchasing razors for resale.

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 $16 and its retail selling price is $70 in both 2014 and 2015. The manufacturer has advised the company to expect warranty costs to equal 5% of dollar sales. The following transactions and events occurred. 2014 Nov. 11 Sold 60 razors for $4,200 cash. 30 Recognized warranty expense related to November sales with an adjusting entry. Dec. 9 Replaced 12 razors that were returned under the warranty. 16 Sold 180 razors for $12,600 cash. 29 Replaced 24 razors that were returned under the warranty. 31 Recognized warranty expense related to December sales with an adjusting entry. 2015 Jan. 5 Sold 120 razors for $8,400 cash. 17 Replaced 29 razors that were returned under the warranty. 31 Recognized warranty expense related to January sales with an adjusting entry.

1. Record the sales revenue of 60 razors for $4,200 cash. .

2. Record the cost of goods sold for 60 razors. .

3. Record the estimated warranty expense at 5% of November sales. .

4. Record the replacement of 12 razors that were returned under the warranty. .

5. Record the sales revenue of 180 razors for $12,600 cash. .

6. Record the cost of goods sold for 180 razors. .

7. Record the replacement of 24 razors that were returned under the warranty. .

8. Record the estimated warranty expense at 5% of December sales.

Explanation / Answer

Answer : 1)

Cash Account Dr. 4200

to Sales Account 4200

(Being Sales Recorded )

2) Cost of goods sold Dr. 960

to Inventory Account 960

(Being Cost of goods sold recorded)

3) Warranty Expense Dr. 210

to Provision of Warranty 210

(being provision created for warranty )

4) Provision for warranty Dr.192

to Inventory A/c 192

(Being razors replaced recorded)

5) Cash A/c D 12600

to Sales A/c 12600

Being Sales recorded

6) Cost of goods sold Account Dr. 2880

to Inventory A/c 2880

(being cost of goods sold recorded)

7) Provision for warranty A/c Dr. 384

to inventory 384

(being razors replaced)

8) Warranty Exp dr. 630

to Provision for Warranty 630

(being provision created )

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