Question

Problem 11-4A Warranty expense and liability estimation LO P4

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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 $15 and its retail selling price is $60 in both 2016 and 2017. The manufacturer has advised the company to expect warranty costs to equal 5% of dollar sales. The following transactions and events occurred.

2016

Nov.		11		Sold 60 razors for $3,600 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 $10,800 cash.
		29		Replaced 24 razors that were returned under the warranty.
		31		Recognized warranty expense related to December sales with an adjusting entry.

2017

Jan.		5		Sold 120 razors for $7,200 cash.
		17		Replaced 29 razors that were returned under the warranty.
		31		Recognized warranty expense related to January sales with an adjusting entry.

3. How much warranty expense is reported for January 2017?
  

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

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

Answer 1

3. Warranty expense of $360 is reported for January 2017.
4. The balance of the Estimated Warranty Liability account as of December 31, 2016 is $612 for 204 razors.

5. The balance of the Estimated Warranty Liability account as of January 31, 2017 is $885 for 295 razors.

Working notes:

					2016
Date	Particulars	Amount	Amount		Date	Particulars	Razors under Warranty
Nov.11	Sales account                                                                                       Dr.	$      3,600.00			Nov.1	Opening	Nil
	To customer account		$    3,600.00		Nov. 11	Addition	60 razors
	(being sale of 60 razors recorded)				Nov. 30	Closing	60 razors
Nov.30	Warranty Expense                                                                               Dr.	$          180.00
	To Warranty Payable		$        180.00
	(being warranty expense for razors sold on Nov. 11 for $3600.00recorded @ 5%)
Dec. 09	Warranty Payable                                                                               Dr.	$            36.00			Dec.1	Opening	60 razors
	To Bank account		$          36.00		Dec.9	Claimed	(12 razors)
	(being warranty claimed for 12 razors) (12*$60*5%)				Dec.16	Addition	180 razors
					Dec.29	Claimed	(24 razors)
Dec.16	Sales account                                                                                       Dr.	$    10,800.00			Dec.31	Closing	204 razors
	To customer account		$ 10,800.00
	(being sale of 180 razors recorded)
Dec. 29	Warranty Payable                                                                               Dr.	$            72.00
	To Bank account		$          72.00
	(being warranty claimed for 24 razors) (24*$60*5%)
Dec.31	Warranty Expense                                                                               Dr.	$          540.00
	To Warranty Payable		$        540.00
	(being warranty expense for razors sold on Dec.16 for $10,800.00recorded @ 5%)
					2017
Jan.05	Sales account                                                                                       Dr.	$      7,200.00			Jan.1	Opening	204 razors
	To customer account		$    7,200.00		Jan.5	Addition	120 razors
	(being sale of 120 razors recorded)				Jan.17	Claimed	(29 razors)
					Jan.31	Closing	295 razors
Jan. 17	Warranty Payable                                                                               Dr.	$            87.00
	To Bank account		$          87.00
	(being warranty claimed for 29 razors) (29*$60*5%)
Jan.31	Warranty Expense                                                                               Dr.	$          360.00
	To Warranty Payable		$        360.00
	(being warranty expense for razors sold on Jan.5 for $7,200.00recorded @ 5%)