Question

Problem 9-4A Warranty expense and liability estimation LO P4 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 $20 and its retail selling price is $75 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 Sold 105 razors for $7,875 cash. Nov. 11 Recognized warranty expense related to November sales with an adjusting entry. 30 Replaced 15 razors that were returned under the warranty. Sold 220 razors for $16,500 cash. Replaced 30 razors that were returned under the warranty. Recognized warranty expense related to December sales with an adjusting entry. Dec. 9 16 29 31 2017 Sold 150 razors for $11,250 cash. Replaced 50 razors that were returned under the warranty. Jan. 17 31 Recognized warranty expense related to January sales with an adjusting entry

Answer 1

1. Journal Entries:

Date	Account Title	PR	Debit	Credit
2016
11-Nov	Purchase of Razor(105*20)	105 Qty	2,100
	To Cash			2,100
	(being cost recognized for purchase of razor)
11-Nov	Cash(105*75)	105 Qty	7,875
	To Sales			7,875
	(being revenue recognized for Sale of razor)
30-Nov	Warranty expense(7875*8%)		630
	To Estimated Warranty Liability			630
	(Accure warranty expense associated with November sales)
9-Dec	Estimated Warranty Liability	15 Qty	300
	To Inventory			300
	(Recongnize warranty costs incurred in November sales)
16-Dec	Purchase of Razor(220*20)	220 Qty	4,400
	To Cash			4,400
	(being cost recognized for purchase of razor)
16-Dec	Cash(105*75)	220 Qty	16,500
	To Sales			16,500
	(being revenue recognized for Sale of razor)
29-Dec	Estimated Warranty Liability	30 Qty	600
	To Inventory			600
	(Recongnize warranty costs incurred in November sales)
30-Dec	Warranty expense(16500*8%)		1,320
	To Estimated Warranty Liability			1,320
	(Accure warranty expense associated with December sales)
2017
5-Jan	Purchase of Razor(150*20)	150 Qty	3,000
	To Cash			3,000
	(being cost recognized for purchase of razor)
17-Jan	Cash(150*75)	150 Qty	11,250
	To Sales			11,250
	(being revenue recognized for Sale of razor)
31-Jan	Warranty expense(11250*8%)		900
	To Estimated Warranty Liability			900
	(Accure warranty expense associated with January sales)

630 (Warranty expense for November 2016) 630 Warranty expense A/C Nov-16 Estimated Warranty Liability 630 Nov-16 Bal c/f 630 Dec-16 Bal B/f 630 Estimated Warranty Liability 1,320 Dec-16 Bal c/f 1,950 Jan-17 Bal B/f 1,950 Jan-17 Estimated Warranty Liability 900 Jan-17 Bal c/f 2,850 1,950 (Warranty expense for December 2016=1,320) 1,950 2,850 (Warranty expense for January 2017=900) 2,850 Nov-16 Bal c/f 9-Dec To Inventory 29-Dec To Inventory 31-Dec Bal c/f Estimated Warranty Liability A/c 630 Nov-16 Warranty expense A/C 630 300 Dec-16 Bal B/f 600 Dec-16 Warranty expense A/c 1,050 1,950 Jan-17 Bal B/f 1,950 Jan-17 Warranty expense A/C 1,950 630 630 630 1,320 Balance as of december 2016= 1050) 1,950 1,050 900 Balance as of January 2017 = 1950) 1,950 Jan-17 Bal c/f