Question

On November 10, 2016, Lee Co. began operations by purchasing coffee grinders for resale. Lee uses the perpetual inventory method. The grinders have a 60-day warranty that requires the company to replace any nonworking grinder. When a grinder is returned, the company discards it and mails a new one from Merchandise Inventory to the customer. The company’s cost per new grinder is $24 and its retail selling price is $50 in both 2016 and 2017. The manufacturer has advised the company to expect warranty costs to equal 10% of dollar sales. The following transactions and events occurred.

2016

Nov.

     16 Sold 50 grinders for $2,500 cash.

     30 Recognized warranty expense related to November sales with an adjusting entry.

Dec.

     12 Replaced six grinders that were returned under the warranty.

     18 Sold 200 grinders for $10,000 cash.

     28 Replaced 17 grinders that were returned under the warranty.

     31 Recognized warranty expense related to December sales with an adjusting entry.

2017

Jan.

    7 Sold 40 grinders for $2,000 cash.

    21 Replaced 36 grinders that were returned under the warranty.

    31 Recognized warranty expense related to January sales with an adjusting entry

Required

1. Prepare journal entries to record these transactions and adjustments for 2016 and 2017.

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	Particulars	Workings	Debit($)	Credit($)
1/11/2016	Cash		2500
	Sales			2500
1/11/2016	Cost of goods sold	($24*50grinders)	1200
	Inventory			1200
30/11/2016	Warranty expense	($2500*10%)	250
	Estimated warranty liabilty			250
12/12/2016	Estimated warranty liabilty	($24*6 grinders)	144
	Inventory			144
18/12/2016	Cash		10000
	Sales			10000
18/12/2016	Cost of goods sold	($24*200 grinders)	4800
	Inventory			4800
28/12/2016	Estimated warranty liability	($24*17grinders)	408
	Inventory			408
30/12/2016	Warranty expense	($10000*10%)	1000
	Estimated warranty liability			1000
7/01/2017	Cash		2000
	Sales			2000
7/01/2017	Cost of goods sold	($24*40 grinders)	960
	Inventory			960
21/01/2017	Estimated warranty liability	($24*36)	864
	To inventory			864
31/01/2017	Warranty expense	($2000*10%)	200
	Estimated warranty liabilty			200

(2) Warranty expense for Nov 2016 = 2500*10% = $ 250

Warranty expense for Dec 2016= 10000*10%= $1000

(3) Warranty expense for Jan 2017= 2000*10% = $ 200

(4) Estimated Warranty Liability Account   

Date	Particulars	Debit($)	Credit($)	Balance($)
30/11/2016	Warranty expense		250	250
12/12/2016	Inventory	144		106
28/12/2016	Inventory	408		-302
31/12/2016	Warranty expense		1000	698

Therefore balance as on 31/12/2016 is $ 698 (Credit)

(5) Estimated Warranty Liability Account   

Date	Particulars	Debit($)	Credit($)	Balance($)
31/12/2016	Opening balance			698
21/01/2017	Inventory	864		-166
31/01/2016	Warranty expense		200	34

Therefore balance as on 31/01/2017 is $ 34 (Credit)