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

Answer 1

The company must make a calculation of the amount of expected warranty claims that will be received in future period.

Here , the company expects warranty costs to 8% of dollar sales. We have to have two account to be set up to record the liability and the expense for warranties.

Nov 30 Dr Warranty expense $ 384

Cr Warranty Liability $384

(being warranty liabilities of 8% of sales $4800 on nov 11 recorded)

Dec 9 Dr Warranty Liability $ 180

Cr Merchandise Inventory $ 180

(being the cost of replacement of Razors under warranty booked)

Dec 29 Dr Warranty Liability $360

Cr Merchandise Inventory $ 360

( being the cost of replacement of Razors under warranty )

31 Dec Dr Warranty Expense $ 1152

Cr Warranty Liability $ 1152

(being warranty liabilities of 8% of sales $14,400 on Dec 16 recorded)

As of 31 Dec ,estimated warranty account would be having the cerdit balance of $996 as shown below.

(Note: Journal entries of other transactions are intentionally avoided)

Dr		Warranty Liability A/c	Cr
Dec-09	Inventory	$180	Nov-30	Warranty Exp.	$384
Dec-29	Inventory	$360	Dec-31	Warranty Exp.	$1152
	balance C/d	$996
		$1536			$1536
			Dec-31	balance B/d	$996