Question

On October 29, 2017 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 $60 in both 2017 and 2018. The manufacturer has advised the company to expect warranty costs to equal 5% of dollar sales. The following transactions and events occurred. 2017 Nov. 11 Sold 70 razors for $4,200 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 $12,600 cash 29 Replaced 28 razors that were returned under the warranty. 31 Recognized warranty expense related to December sales with an adjusting entry. 2018 Jan 5 Sold 140 razors for $8,400 cash. 17 Replaced 33 rators that were returned under the warranty. 31 Recognized warranty expense related to January sales with an adjusting entry. Problem 9-4A Part 5 5. What is the balance of the Estimated Warranty Liability account as of January 31, 2018? Estimated warranty liability balance

Answer 1

5
Warranty expense for November 2016	210	=4200*5%
Warranty expense for December 2016	630	=12600*5%
Warranty expense for January 2017	420	=8400*5%
Less: Cost of replacements	-1125	=(14+28+33)*15
Estimated Warranty Liability balance	135