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 $13 and its retail selling price is $90 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 $6,300 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 $18,900 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 $12,600 cash.
		17		Replaced 33 razors that were returned under the warranty.
		31		Recognized warranty expense related to January sales with an adjusting entry.

1. How much warranty expense is reported for November 2016 and for December 2016?
2. How much warranty expense is reported for January 2017?
3. What is the balance of the Estimated Warranty Liability account as of December 31, 2016?
4. What is the balance of the Estimated Warranty Liability account as of January 31, 2017?

Answer 1

1) warranty expenses nov 2016 (6300*7%)			441
warranty expenses december 2016 (18900*7%)			1323
2) waranty expenses for january 2017 (12600*7%)			882
3) estimated warranty liability account 31 december 2016
warranty expenses of november 2016			441
warranty expenses of december 2016			1323
less: cost of replacing (14+28)*13			-546
estimated warranty liability 31 december 2016			1218
4) estimated warranty liability account 31 january 2017
estimated warranty beginning balance			1218
warranty expenses of january 2017			882
cost of replacing (33*13)			-429
estimated warranty liability 31 january 2017			1671