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Problem 9-4A Estimating warranty expense and liability LO P4

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On October 29, Lobo Co. began operations by purchasing razors for resale. The razors have a 90-day warranty. 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. The company expects warranty costs to equal 8% of dollar sales. The following transactions occurred.

Nov.		11		Sold 105 razors for $7,875 cash.
		30		Recognized warranty expense related to November sales with an adjusting entry.
Dec.		9		Replaced 15 razors that were returned under the warranty.
		16		Sold 220 razors for $16,500 cash.
		29		Replaced 30 razors that were returned under the warranty.
		31		Recognized warranty expense related to December sales with an adjusting entry.
Jan.		5		Sold 150 razors for $11,250 cash.
		17		Replaced 50 razors that were returned under the warranty.
		31		Recognized warranty expense related to January sales with an adjusting entry.

Problem 9-4A Part 2

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

Answer 1

.

Given:-

Warranty expenses are estimated on the basis of dollar sales. The estimated warranty liability account are opened.

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The company expects warranty costs to equal 8% of dollar sales

.

In November and December there is an adjusting entries regarding warranty estimation, which is:

The sales in each month

In November, sales = Sold 105 razors for $7,875 cash

In December sales = Sold 220 razors for $16,500 cash

.

Estimated warranty expenses in November = $7875 * 8% = $630

Estimated warranty expenses in December = $16500 * 8% = $1320

.

Adjusting entry like this

Date	Accounts	Debit	Credit
Nov. 30	Warranty Expense     [Sales x 8% = $7875x 8%]	$630
	Estimated Warranty Liability		$630
Dec 31	Warranty Expense     [Sales x 8% = $16500 * 8%]	$1320
	Estimated Warranty Liability		$1320

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How much warranty expense is reported for November and December

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Warranty expenses in November = $630

Warranty expenses in December   = $1320

Total ……………………………………………….= $1950