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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 $20 and its retail selling price is $75 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 105 razors for $7,875 cash.
		30		Recognized warranty expense related to November sales with an adjusting entry.
Dec.		9		Replaced 15 razors that were returned under the warranty.
		16		Sold 220 razors for $16,500 cash.
		29		Replaced 30 razors that were returned under the warranty.
		31		Recognized warranty expense related to December sales with an adjusting entry.

2017

Jan.		5		Sold 150 razors for $11,250 cash.
		17		Replaced 50 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 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?

1.5  What is the balance of the Estimated Warranty Liability account as of January 31, 2017?

Answer 1

Date	Particulars	Debit	Credit
Nov-11	Cash	7875
	sales		7875
	Cost of goods sold	2100
	inventory		2100
	(105*20)
Nov-30	Warranty expense	630
	estimated warranty liability		630
	(7875*8%)
Dec-09	estimated warranty liability	300
	inventory		300
	(15*$20)
Dec-16	Cash	16500
	sales		16500
	Cost of goods sold	4400
	inventory		4400
	(220*20)
Dec-31	estimated warranty liability	600
	inventory		600
	(30*$20)
Dec-31	Warranty expense	1320
	estimated warranty liability		1320
2017
Jan-05	Cash	11250
	sales		11250
	Cost of goods sold	3000
	inventory		3000
	(150*20)
Jan-17	estimated warranty liability	1000
	inventory		1000
	(50*$20)
Jan-31	Warranty expense	900
	estimated warranty liability		900
Ques 2
	Warranty expense
	Nov	630
	Dec	1320
	(16500*8%)
ques 3	Warranty expense
	Jan	900
	(11250*8%)
ques 4	Balance-dec	1050
	(630+1320-300-600)
ques 5	Balance-jan	950
	(1050+900-1000)