WileyPLUS Problem 10-3 Larkspur, 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 $37 and cost $27. All sales are on account, and the 13% HST is not included in the selling price. Also, in the last year, Larkspur began selling gift cards in denominations of $58 and $20. Cash and/or credit cards were accepted for payment. This practice was started when Larkspur's CFO learned that not all of the gift cards are actually redeemed. HST is recorded at the time of redemption. Larkspur has a calendar year end and uses a perpetual inventory system. Transactions for the current fiscal year include the following: 1. Sales of 3,890 units. 2. Return of 260 units not defective, returned to inventory. 3. Replaced 41 units under warranty. 4. Sold $50,390 of gift cards. 5. Redeemed $14,960 of gift cards; COGS was $9,050. (Hint: The redeemed gift cards were used to pay for merchandise as well as the HST.) Prepare journal entries for the above transactions. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Round answers to 0 decimal places, e.g. 5,275.) Date Account Titles and Explanation Debit Credit Summary Cash 162641 Sales 143930 HST Payable 18711 (To record sales and sales tax payable) Cost of Goods Sold 105030 Merchandise Inventory 105030 (To record cost of goods sold) Sales Returns and Allowances 9620 HST Payable 1251 Cash 10871 (To record sales returns and sales taxes) Merchandise Inventory 7020 Cost of Goods Sold 7020 (To record cost of goods sold) Warranty Expense 1107 M Merchandise Inventory 1107 Cash 50390 Redemption Rewards Liability 50390 (To record sale of gift cards) x Redemption Rewards Liability 14960 Sales 13239 HST Payable 1721 (To record redemption of gift cards) Cost of Goods Sold 9050 Merchandise Inventory 9050 (To record cost of goods sold) Your answer is partially correct. Try again. Prepare any adjusting journal entries required on December 31, the end of the fiscal year. (Hint: Assume 11% the gift cards will never be redeemed.) (Credit account titles are automatically Indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Round answers to o decimal places, e.g. 5,275.) Account Titles and Explanation Debit Credit Warranty Expense 1053 Warranty Liability 1053 (To accrue warranty costs) X Redemption Rewards Liability X 35430 x Unearned Gift Card Revenue 5543 ! Revenue 29887 (To record redemption) Your answer is partially correct. Try again. Prepare the journal entry to record payment of the HST. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Round answers to o decimal places, e.g. 5,275.) Account Titles and Explanation Debit Credit HST Payable 19181 x Cash 19181 * Your answer is incorrect. Try again. What is the ending balance in the Warranty Liability account on December 31 (after adjustments)? (Round answer to 0 decimal places, e.g. 5,275.) X Ending balance in the Warranty Liability Debit balance v 1053 of $1
