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 $80 in both 2016 and 2017. The manufacturer has advised the company to expect warranty costs to equal 6% of dollar sales. The following transactions and events occurred.

2016

Nov.		11		Sold 80 razors for $6,400 cash.
		30		Recognized warranty expense related to November sales with an adjusting entry.
Dec.		9		Replaced 16 razors that were returned under the warranty.
		16		Sold 240 razors for $19,200 cash.
		29		Replaced 32 razors that were returned under the warranty.
		31		Recognized warranty expense related to December sales with an adjusting entry.

2017

Jan.		5		Sold 160 razors for $12,800 cash.
		17		Replaced 37 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?
  

Answer 1

Note :On dec 29. actual warranty claim amount is greater than the warranty liability created..that excess amount is considered as expenses and debited as warranty expenses account.