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 $20 and its retail selling price is $75 in both 2016 and 2017. The manufacturer has advised the company to expect warranty costs to equal 8% of dollar sales. The following transactions and events occurred.

2016

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.

2017

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.

1.1 Prepare journal entries to record above transactions and adjustments for 2016.
ow much warranty expense is reported for November 2016 and for December 2016?

How much warranty expense is reported for January 2017?

What is the balance of the Estimated Warranty Liability account as of December 31, 2016

What is the balance of the Estimated Warranty Liability account as of January 31, 2017?

Answer 1

Date	General Jounal	Debit	credit
2016
Nov. 11	Cash	7875
	Sales		7875
Nov 11	Cost of goods sold	2100
	Merchandise inventory		2100
Nov 30	warranty expense	630
	Estimated warranty liability		630
Dec 09	Estimated warranty liability	300
	merchandise inventory		300
Dec 16	Cash	16500
	sales		16500
Dec 16	Cost of gods sold	4400
	Merchandise inventory		4400
Dec 29	Estimated warranty liability	600
	Merchandise inventory		600
Dec 31	Warranty expense	1320
	Estimated warranty liability		1320

Date	General Jounal	Debit	credit
2017
Jan 5	Cash	11250
	Sales		11250
Jan 5	Cost of goods sold	3000
	Merchandise inventory		3000
Jan 17	Estimated warranty liability	1000
	merchandise inventory		1000
Jan 31	warranty expense	900
	estimated warranty liability		900

much warranty expense is reported for November 2016 and for December 2016?

How much warranty expense is reported for January 2017

Warranty expense for November 2016 = 630

Warranty expense for December 2016 = 1320

Warranty expense for January 2017 = 900

What is the balance of the Estimated Warranty Liability account as of December 31, 2016

Answer = 1050

What is the balance of the Estimated Warranty Liability account as of January 31, 2017?

Answer = 950