Question

9-4

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 $14 and its retail selling price is $90 in both 2016 and 2017. The manufacturer has advised the company to expect warranty costs to equal 9% of dollar sales. The following transactions and events occurred.

2016

Nov.		11		Sold 50 razors for $4,500 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 $13,500 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 $9,000 cash.
		17		Replaced 25 razors that were returned under the warranty.
		31		Recognized warranty expense related to January sales with an adjusting entry.

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

	Warranty expense for November 2016 Warranty expense 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

2. Warranty Expense for November 2016 and for December 2016:

For November

Razors’ Sale Value = $4,500

Expected Warranty Costs = 9% of Dollar Sale

Warranty Expense for November 2016 = 9% of $4,500

                                                                                =$405.

For December

Razors Sold= 150 @ $90 =$ 13,500.

Total Razors replaced in December = 10+20 = 30

Total Replacement Cost @$14= $14*30 = $420.

Warranty Expense for December 2016= (9% of $13,500) + Shortfall of Provision for last month

                                                                          = $1,215 + ($420-$405)

                                                                           = $1,230.

3. Warranty expense for January 2017

Razors sold = 100@$90 = $9,000

Razors Replaced = 25

Replacement Cost = 25 @ $14 =$350

Warranty Expense for the month = 9% of $9,000 = $810.

4. Estimated Warranty Liability account balance as of December 31, 2016 = $1,215

5. Estimated Warranty Liability account balance as of January 31, 2017 = $1,215 - $350 + $810

                                                                                                                                            = $1,675.