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 $80 in both 2017 and 2018. The manufacturer has advised the company to expect warranty costs to equal 6% of dollar sales. The following transactions and events occurred.

2017

Nov.		11		Sold 70 razors for $5,600 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 $16,800 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 $11,200 cash.
		17		Replaced 33 razors that were returned under the warranty.
		31		Recognized warranty expense related to January sales with an adjusting entry.

Problem 9-4A Part 1

1a. Prepare journal entries to record above transactions and adjustments for 2017.
1b. Prepare journal entries to record above transactions and adjustments for 2018.

2. How much warranty expense is reported for November 2017 and for December 2017?

3. How much warranty expense is reported for January 2018?

4. What is the balance of the Estimated Warranty Liability account as of December 31, 2017?
5. What is the balance of the Estimated Warranty Liability account as of January 31, 2018?

Answer 1

	Date	Particulars	Debit	Credit
1(a)	11-Nov	Cash	5600
		To Sales		5600
	30-Nov	Warranty Expenses	336
		To Deferred Warranty expenses		336
		(5600*6/100)
	9-Dec	Deferred Warranty expenses	67.2
		To Cash		67.2
		(14*80*6/100)
	16-Dec	Cash	16800
		To Sales		16800
	29-Dec	Deferred Warranty expenses	134.4
		To Cash		134.4
		(28*80*6/100)
	31-Dec	Warranty Expenses	1008
		To Deferred Warranty expenses		1008
	31-Dec	Warranty Expenses	44.8
		To Deferred Warranty expenses		44.8
1(B)	2018
	5-Jan	Cash	11200
		To Sales		11200
	17-Jan	Deferred Warranty expenses	158.4
		To Cash		158.4
		(33*80*6/100)
	31-Jan	Warranty Expenses	672
		To Deferred Warranty expenses		672
2
		Expenses Reported In 2017 november	336
		Expenses Reported In 2017 november	246.4
3		Expenses Reported In 2018 JAN	672
4		Balance Liability as on 31/12/2017	1097.6
5		Balance Liability as on 31/01/2018	1611.2