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 $15 and its retail selling price is $90 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 60 razors for $5,400 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 $16,200 cash.
		29		Replaced 24 razors that were returned under the warranty.
		31		Recognized warranty expense related to December sales with an adjusting entry.

2017

Jan.		5		Sold 120 razors for $10,800 cash.
		17		Replaced 29 razors that were returned under the warranty.
		31		Recognized warranty expense related to January sales with an adjusting entry.

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

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

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

Answer 1

Facts Given

Cost of razor = $15

Sale price of razor = $90

Warranty expenses = 8% of doller sales.

So we can calculate warranty expenses as follows = Sales Amount x 8%

So warrenty Exps. For Nov 2016 will be = (60 x 90) x 8% = 5400 x 8% = $432

So warrenty Exps. For Dec 2016 will be = (180 x 90) x 8% = 16200 x 8% = $1296

So warrenty Exps. For Jan 2017 will be = (120 x 90 ) x 8% = 10800 x 8% = $864

Estimated warrenty Liability Account

Nov 30	Balance c/f	432	Nov 30	Warrenty Expenses	432
Dec 9	Razor	180	Dec 1	Balance b/f	432
Dec 24	Razor	360	Dec 31	Warrenty Expenses	1296
Dec 31	Balance c/f	1188
Jan 17	Razor	435	Jan 1	Balance b/f	1188
Jan 31	Balance c/f	1617		Warrenty Expenses	864

So Balance of estimated warrenty liabilities account as on December 31, 2016 is $1188 from above account.

Notes:

Warrenty expenses at the time of replacement will be calculated on the cost of the razor to the company as $15 in this case given. so warrenty liability account is adjusted as per $15 per razor.

Warrenty expenses are accounted @8 percent of sales amount

Journal entry for better understanding

Nov 11	Cash	5400
	Razor		5400
	(Cash Sale)
Nov 30	Warrenty Exps.	432
	Estimated warrenty Liabilities		432
	(Provision made)
Dec 9	Estimated warrenty liabilities a/c	180
	Razor A/c		180
	(Razor replaced)
Dec 16	Cash A/c	16200
	Razor		16200
Dec 29	Est. warrenty liab. a/c	360
	Razor		360
Dec 31	Warrenty Exps. A/c	1296
	Estimated warrenty liabilities A/c		1296
Jan 5	Cash A/c	10800
	Razor		10800
Jan 17	Estimated warrenty liability a/c	435
	Razor A/c		435
Jan 31	Warrenty Exps. a/c	864
	Estimated warrenty liabilities a/c		864

So above is the solution to the problem.