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 $13 and its retail selling price is $80 in both 2014 and 2015. The manufacturer has advised the company to expect warranty costs to equal 7% of dollar sales. The following transactions and events occurred.

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 $13 and its retail selling price is $80 in both 2014 and 2015. The manufacturer has advised the company to expect warranty costs to equal 7% of dollar sales. The following transactions and events occurred.

Explanation / Answer

JOURNAL ENTRY Date Particulars Debit Credit 2014 11-Nov cash A/c $      6,400               To Sales $      6,400 11-Nov Cost of goods sold (13*80) $      1,040              To Merchandise Inventory $      1,040 30-Nov warranty expenses (6400*7%) $         448             To estimated warranty Liability $         448 9-Dec Estimated Warranty Liability (16*13) $         208              To Merchandise Inventory $         208 16-Dec Cash A/c $    19,200            to Sales $    19,200 16-Dec Cost of goods sold (240*13) $      3,120              To Merchandise Inventory $      3,120 29-Dec Estimated Warranty Liability (32*13) $              416              To Merchandise Inventory $              416 31-Dec warranty expenses (19200*7%) $          1,344             To estimated warranty Liability $          1,344 2015 5-Jan Cash A/c $        12,800            to Sales $        12,800 5-Jan Cost of goods sold (160*13) $          2,080              To Merchandise Inventory $          2,080 17-Jan Estimated Warranty Liability (37*13) $              481              To Merchandise Inventory $              481 31-Jan warranty expenses (12800*7%) $              896             To estimated warranty Liability $              896

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