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 $70 in both 2016 and 2017. The manufacturer has advised the company to expect warranty costs to equal 8% of dollar sales. The following transactions and events occurred. 2016 Nov. 11 Sold 50 razors for $3,500 cash. 30 Recognized warranty expense related to November sales with an adjusting entry. Dec. 9 Replaced 10 razors that were returned under the warranty. 16 Sold 150 razors for $10,500 cash. 29 Replaced 20 razors that were returned under the warranty. 31 Recognized warranty expense related to December sales with an adjusting entry. 2017 Jan. 5 Sold 100 razors for $7,000 cash. 17 Replaced 25 razors that were returned under the warranty. 31 Recognized warranty expense related to January sales with an adjusting entry. 5. What is the balance of the Estimated Warranty Liability account as of January 31, 2017? Estimated warranty liability balance

Answer 1

Answer 5:

Estimated warranty liability balance $855

Working:

The journal entries and T account of Warranty Liability with Jan 31, 2017 balance is as follows:

Accounts Title and Explanations Debit Credit Working: Date 2016 Nov. 11 $3,500 Cash Sales Revenue (to record sales revenue on cash) $3,500 Nov. 30 $280 =3500*8% Warranty Expense Warranty Liability (to record warranty expense) $280 Dec. 9 $150 =10*$15 Warranty liability Merchandise Inventory |(to record replacement done under warranty) S150 Dec. 16 $10,500 Cash Sales Revenue (to record sales revenue on cash) $10,500 Dec. 29 $300 =20*$15 Warranty liability Merchandise Inventory (to record replacement done under warranty) $300 Dec. 31 $840 =10500*8% Warranty Expense Warranty Liability (to record warranty expense) $840 Accounts Title and Explanations Debit Credit Date 2017 Jan.5 $7,000 Cash Sales Revenue (to record sales revenue on cash) $7,000 Jan. 17 $375 =25*$15 Warranty liability Merchandise Inventory (to record replacement done under warranty) $375 Jan. 31 $560 =7000*8% Warranty Expense Warranty Liability (to record warranty expense) $560

2016 Dec. 9 Dec. 29 Jan. 17 Warranty liability $150 $280 Nov. 30 $300 $840 Dec. 31 $375 $560 Jan. 31 2017 $855 Bal. Jan 31