Question

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 $14 and its retail selling price is $70. The company expects warranty costs to equal 6% of dollar sales. The following transactions occurred.

Nov.		11		Sold 60 razors for $4,200 cash.
		30		Recognized warranty expense related to November sales with an adjusting entry.
Dec.		9		Replaced 12 razors that were returned under the warranty.
		16		Sold 180 razors for $12,600 cash.
		29		Replaced 24 razors that were returned under the warranty.
		31		Recognized warranty expense related to December sales with an adjusting entry.
Jan.		5		Sold 120 razors for $8,400 cash.
		17		Replaced 29 razors that were returned under the warranty.
		31		Recognized warranty expense related to January sales with an adjusting entry.

1a. Prepare journal entries to record above transactions and adjustments.

Date	General Journal	Debit	Credit
Nov 11
Nov 11
Nov 30
Dec 09
Dec 16
Dec 16
Dec 29
Dec 31

1b. How much warranty expense is reported for November and December?

1c. How much warranty expense is reported for January?

1d. What is the balance of the estimated warranty liability account as of Dec 31?

Answer 1

1a
Date	General Journal	Debit	Credit
11-Nov	Cash	4,200
	Sales		4,200
11-Nov	Cost of goods sold	840		=60*14
	Merchandise inventory		840
30-Nov	Warranty expense	252		=4200*6%
	Estimated warranty liability		252
9-Dec	Estimated warranty liability	168		=12*14
	Merchandise inventory		168
16-Dec	Cash	12,600
	Sales		12,600
16-Dec	Cost of goods sold	2,520		=180*14
	Merchandise inventory		2,520
29-Dec	Estimated warranty liability	336		=24*14
	Merchandise inventory		336
31-Dec	Warranty expense	756		=12600*6%
	Estimated warranty liability		756
1.2
Date	General Journal	Debit	Credit
5-Jan	Cash	8,400
	Sales		8,400
5-Jan	Cost of goods sold	1,680		=120*14
	Merchandise inventory		1,680
17-Jan	Estimated warranty liability	406		=29*14
	Merchandise inventory		406
31-Jan	Warranty expense	504		=8400*6%
	Estimated warranty liability		504
1b
	Warranty expense for November	252		=4200*6%
	Warranty expense for December	756		=12600*6%
1c	Warranty expense for January	504		=8400*6%
1d
	Warranty expense for November	252
	Warranty expense for December	756
	Less: Cost of replacements	-504		=(12+24)*14
	Estimated Warranty Liability balance as of Dec 31	504