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 $14 and its retail selling price is $70 in both 2016 and 2017. The manufacturer has advised the company to expect warranty costs to equal 6% of dollar sales. The following transactions and events occurred.

2016

Nov.		11		Sold 50 razors for $3,500 cash.
		30		Recognized warranty expense related to November sales with an adjusting entry.
Dec.		9		Replaced 10 razors that were returned under the warranty.
		16		Sold 150 razors for $10,500 cash.
		29		Replaced 20 razors that were returned under the warranty.
		31		Recognized warranty expense related to December sales with an adjusting entry.

2017

Jan.		5		Sold 100 razors for $7,000 cash.
		17		Replaced 25 razors that were returned under the warranty.
		31		Recognized warranty expense related to January sales with an adjusting entry. .1 Prepare journal entries to record above transactions and adjustments for 2016 2. How much warranty expense is reported for November 2016 and for December 2016? 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

Date	Journal Entry	Debit	Credit
11-Nov	Cash	3500
	Sales Revenue		3500
	(being 50 razors sold for $3500)
	Cost of Goods Sold	700
	Inventory		700
	(Being 50 razor sold which was purchased at cost of $14 (50 x14) = 700
30-Nov	Warranty Expense	210
	Accrued Warranty Liability		210
	(Being warrenty expense recognised @ 6% on doller sales (70* 6%) = 4.20 (Sales 50 razor x 4.20 ) = $210
9-Dec	Accrued Warranty Liability	140
	Inventory		140
	(Being 10 razor replace at the cost of $14) (10*14) = 140
16-Dec	Cash	10500
	Sales Revenue		10500
	(being 150 razors sold for $10500)
	Cost of Goods Sold	2100
	Inventory		2100
	(Being 150 razor sold which was purchased at cost of $14 (150 x14) = 2100
29-Dec	Accrued Warranty Liability	70
	Warranty Expense	210
	Inventory		280
	(20 Razors replaced under warrenty = (20*14)=280 , Accrued warrenty liability Balance (210-140) = 70, Excess 210 debited in warrenty expense account.
31-Dec	Warranty Expense	420
	Accrued Warranty Liability		420
	(Total warranty expense to be recognized = 150 *4.2 = 630, out of which 210 is already debited to warranty expense, Balance (630-210) = 420 to be recognized as warranty expense
Jan	Cash	7000
	Sales Revenue		7000
	(Sols 100 razor for $7000 cash)
	Cost of Goods Sold	1400
	Inventory		1400
	(Being 100 razor sold which was purchased at cost of $14 (100 x14) = 1400
	Accrued Warranty Liability	350
	Inventory		350
	(Being 14 x 25) = 350

Warranty Expense	420
Accrued Warranty Liability		420
(100 *4.20) is the warranty for Jan = 420

2. How much warranty expense is reported for November 2016 and for December 2016?

Warrenty expense for Nov = $210 (refer the entry of nov-30)

A warranty expense for Dec -$630 (refer entry of 29 dec and 30 dec)

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

Warranty expense reported in Jan is $420 (Jan sales 100 x 4.20(70*6%))=420

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

Balance on 31-dec is $420.00

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

Balance in Jan = (Dec balance $420 - $350 utilised + 420 recignised) = $490