Question

On October 29, 2016, 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 $15 and its retail selling price is $80 in both 2016 and 2017. The manufacturer has advised the company to expect warranty costs to equal 7% of dollar sales. The following transactions and events occurred.

2016

Nov.		11		Sold 70 razors for $5,600 cash.
		30		Recognized warranty expense related to November sales with an adjusting entry.
Dec.		9		Replaced 14 razors that were returned under the warranty.
		16		Sold 210 razors for $16,800 cash.
		29		Replaced 28 razors that were returned under the warranty.
		31		Recognized warranty expense related to December sales with an adjusting entry.

2017

Jan.		5		Sold 140 razors for $11,200 cash.
		17		Replaced 33 razors that were returned under the warranty.
		31		Recognized warranty expense related to January sales with an adjusting entry.

1.1 Prepare journal entries to record above transactions and adjustments for 2016.

1.2 Prepare journal entries to record above transactions and adjustments for 2017.

2. How much warranty expense is reported for November 2016 and for December 2016?

3. How much warranty expense is reported for January 2017?

4. What is the balance of the Estimated Warranty Liability account as of December 31, 2016?

5. What is the balance of the Estimated Warranty Liability account as of January 31, 2017?

Answer 1

1.1
Date	General Journal	Debit	Credit
11-Nov	Cash	5,600
	Sales		5,600
11-Nov	Cost of goods sold	1050		=70*15
	Merchandise inventory		1,050
30-Nov	Warranty expense	392		=5600*7%
	Estimated warranty liability		392
9-Dec	Estimated warranty liability	210		=14*15
	Merchandise inventory		210
16-Dec	Cash	16,800
	Sales		16,800
16-Dec	Cost of goods sold	3,150		=210*15
	Merchandise inventory		3,150
29-Dec	Estimated warranty liability	420		=28*15
	Merchandise inventory		420
31-Dec	Warranty expense	1,176		=16800*7%
	Estimated warranty liability		1,176
1.2
Date	General Journal	Debit	Credit
5-Jan	Cash	11,200
	Sales		11,200
5-Jan	Cost of goods sold	2,100		=140*15
	Merchandise inventory		2,100
17-Jan	Estimated warranty liability	495		=33*15
	Merchandise inventory		495
31-Jan	Warranty expense	784		=11200*7%
	Estimated warranty liability		784
2
	Warranty expense for November	392	=5600*7%
	Warranty expense for December	1176	=16800*7%
3	Warranty expense for January	784	=11200*7%
4	Warranty expense for November	392
	Warranty expense for December	1176
	Less: Cost of replacements	-630	=(14+28)*15
	Estimated Warranty Liability account, December 31, 2016	938
5	Estimated Warranty Liability account, December 31, 2016	938
	Warranty expense for January	784
	Less: Cost of replacements	-495	=33*15
	Estimated Warranty Liability account, January 31, 2017	1227