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 $80 in both 2016 and 2017. The manufacturer has advised the company to expect warranty costs to equal 8% of dollar sales. The following transactions and events occurred.

2016

Nov.		11		Sold 70 razors for $5,600 cash.
		30		Recognized warranty expense related to November sales with an adjusting entry.
Dec.		9		Replaced 14 razors that were returned under the warranty.
		16		Sold 210 razors for $16,800 cash.
		29		Replaced 28 razors that were returned under the warranty.
		31		Recognized warranty expense related to December sales with an adjusting entry.

2017

Jan.		5		Sold 140 razors for $11,200 cash.
		17		Replaced 33 razors that were returned under the warranty.
		31		Recognized warranty expense related to January sales with an adjusting entry.

1.1 Prepare journal entries to record above transactions and adjustments for 2016.

1.2 Prepare journal entries to record above transactions and adjustments for 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

1.1	Date	General Journal	Debit	Credit
	11-Nov	Cash	5,600
		Sales		5,600
	11-Nov	Cost of goods sold	980
		Merchandise inventory		980
		70*14
	30-Nov	Warranty expense	448
		Estimated warranty liability		448
		5600*8%
	09-Dec	Estimated warranty liability	196
		Merchandise inventory		196
		14*14
	16-Dec	Cash	16,800
		Sales		16,800
	16-Dec	Cost of goods sold	2,940
		Merchandise inventory		2,940
		210*14
	29-Dec	Estimated warranty liability	392
		Merchandise inventory		392
		28*14
	31-Dec	Warranty expense	1,344
		Estimated warranty liability		1,344
		16800*8%

1.2	Date	General Journal	Debit	Credit
	05-Jan	Cash	11,200
		Sales		11,200
	05-Jan	Cost of goods sold	1,960
		Merchandise inventory		1,960
		140*14
	17-Jan	Estimated warranty liability	462
		Merchandise inventory		462
		33*14
	31-Jan	Warranty expense	896
		Estimated warranty liability		896
		8%*11200

2	Warranty expense for November 2016	$448
	Warranty expense for December 2016	$1,344
3	Warranty expense	896
4	Estimated warranty liability balance 2016	$1,204
5	Estimated warranty liability balance 2017	$1,638

4

Warranty expense for November	448	credit
Warranty expense for December	1,344	credit
Cost of replacing items in December (14+28 × $14)	-588	debit
Estimated warranty liability balance	1204	credit
(5)
Beginning balance	1204	credit
Warranty expense for January	896	credit
Cost of replacing items in January (33 × $14)	-462	debit
Estimated warranty liability balance	1,638	credit