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 $15 and its retail selling price is $80. The company expects warranty costs to equal 8% of dollar sales. The following transactions occurred. Nov. 11 Sold 60 razors for $4,800 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 $14,400 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 $9,600 cash. 17 Replaced 29 razors that were returned under the warranty. 31 Recognized warranty expense related to January sales with an adjusting entry. 5. What is the balance of the Estimated Warranty Liability account as of January 31?

Answer 1

Ans:

Journal Entries in the books of Lobo Co.

Date	Accounting Name	Debit ($)	Credit ($)
Year 1
Nov 11	Cash (60 * $80)	$4800
	Sales		$4800
	(Being 60 razors sold for $80 per razor)
Nov 11	Cost of goods sold (60 * $15)	$900
	Merchandise Inventory		$900
	(Being cost of sales recorded)
Nov 30	Warranty Expense ($4800 * 8%)	$384
	Estimated Warranty Liability		$384
	(Being warranty expense recorded for november sales on estimation basis)
Dec 9	Estimated Warranty Liabilty (12 * $15)	$180
	Merchandise Inventory		$180
	(Being warranty liability recorded for replaced razors)
Dec 16	Cash (180 * $80)	$14400
	Sales		$14400
	(Being 180 razors sold for $80 per razor)
Dec 16	Cost of goods sold (180 * $15)	$2700
	Merchandise Inventory		$2700
	(Being cost of sales recorded)
Dec 29	Estimated Warranty Liabilty (24 * $15)	$360
	Merchandise Inventory		$360
	(Being warranty liability recorded for replaced razors)
Dec 31	Warranty Expense ($14400 * 8%)	$1152
	Estimated Warranty Liability		$1152
	(Being warranty expense recorded for december sales on estimation basis)
Year 2
Jan 5	Cash (120 & $80)	$9600
	Sales		$9600
	(being 120 razors sold for $80 per razor)
Jan 5	Cost of goods sold (120 * $15)	$1800
	Merchandise Inventory		$1800
	(Being cost of sales recorded)
Jan 17	Estimated Warranty Liabilty (29 * $15)	$435
	Merchandise Inventory		$435
	(Being warranty liability recorded for replaced razors)
Jan 31	Warranty Expense ($9600 * 8%)	$768
	Estimated Warranty Liability		$768
	(Being warranty expense recorded for january sales on estimation basis)

On January 31, Balance of Estimated Warranty Liability account is $1329 credit balance (from journal entries)