Chapter 12, Problem 7PB

Shoe Hut sells custom, handmade shoes. It offers a one-year warranty on all shoes for repair or replacement. Review each of the transactions and prepare any necessary journal entries for each situation.

A. May 31: Shoe Hut sells 100 pairs of shoes during the month of May at a sales price per pair of shoes of $240 cash. Shoe Hut records warranty estimates when sales are recognized and bases warranty estimates on 4% of sales.

B. June 2: A customer files a warranty claim that Shoe Hut honors in the amount of $30 for repair to laces. Laces Inventory corresponds to shoelace inventory used for repairs.

C. June 4: Another customer files a warranty claim that Shoe Hut honors. Shoe Hut replaces the damaged shoes at a cost of $200, affecting their Shoe Replacement Inventory account.

D. August 10: Shoe Hut explores the possibility of bankruptcy, given the current economic conditions (recession). It determines the bankruptcy is unlikely to occur (remote).