** The volume Macintosh HD could not be repaired.
Your problem sounds minor, run through this list and when you Repair Disk, do it again a second time and it should hopefully be clear.
The MacBook is pretty new but hasnt been used.
Likely what is is factory bad sectors that all new drives have. They normally get mapped off automatically, but can cause issues in newer machines until they do. There is a way to force map them off, which is going to solve the problem.
So theres is nothing important on the hd. And since it came with OS X Lion there was no CD so I cant install from CD. Maybe I could burn a copy of Lion or try to put Lion on a USB stick?
No need, there is a Recovery HD partition which your going to learn all about in the above link.
If Disk Utility > Repair or the above Steps don't fix the problem, then proceed:
What you do is backup any files off the machine (Step #9) and then from the Recovery HD partition use Disk Utility to Erase the Macintosh HD partition with the middle secure erase feature (important) this will map off the bad sectors when the zero file is read back for conformation. It will take awhile to complete.
Then quit Disk Utility and install OS X Lion from Apple's servers using a (preferably) Ethernet wired connection, AppleID and password of the original user so they can update.
The free iLife won't be on the machine, but all is in this link how to restore.
When you recreate the account on the machine, keep the same user name if you want to return those files into it.
It seems like the Hard drive had it and may need replacing.
In order to make sure yiu need an install CD or you can also install from USB as you sggested.
You need to download the system on another computer, make bootable CD or USB and start from it.
Before you run install open disck utility and check the hard drive for errors - most likely you will need to replace it.
Let m kenow if you need detailed info on any of the steps I mentioned.
I'm trying to follow your step by step guide. At #5 (Disk Utility) I have just booted holding command+r. I chose Disk Utility and I can see my HD (Macintosh HD) on the left side but now I'm stuck on
Select the drive or partition on the left, click First Aid > Repair Disk & Permissions.
All I see is a HD called Toshiba... Macintosh HD is shown below. SuperDrive is greyed out and is followed by a horizontal line. Then there is "disk1" and "Mac OS X Base System" below. Hope this makes sense.
The Repair disk option is available if I choose the "500 GB Toshiba..." option. Trying Repair disk now gives me that the partition map seems to be OK. I can't choose the Repair permissions also. That one is greyed out. I did control disc and permission for the Macintosh HD which says that the permission are wrong. A repair wasnt possible after this.
I'm now at #6 (Reset user's permission) where I have reset permission and ACLs but the spinning gear is spinnning for quite some time nothing happens.
I should also add that the MacBook has been used to setup user profile and password. In the password section when signing in I tried to reboot the Mac and since then I cant get back to that screen.