[The following information applies to the questions displayed below.] On October

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[The following information applies to the questions displayed below.]

On October 29, 2015, 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 2015 and 2016. The manufacturer has advised the company to expect warranty costs to equal 7% of dollar sales. The following transactions and events occurred.

2015

Nov 11 Sold 80 razors for $6,400 cash.
        30 Recognized warranty expense related to November sales with an adjusting entry.
Dec. 9   Replaced 16 razors that were returned under the warranty.
        16 Sold 240 razors for $19,200 cash.
        29 Replaced 32 razors that were returned under the warranty.
        31 Recognized warranty expense related to December sales with an adjusting entry.

   
2016

Jan. 5 Sold 160 razors for $12,800 cash.
     17 Replaced 37 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 these transactions and adjustments for 2015.
1.2 Prepare journal entries to record these transactions and adjustments for 2016.
2. How much warranty expense is reported for November 2015 and for December 2015?
3. How much warranty expense is reported for January 2016?
4. What is the balance of the Estimated Warranty Liability account as of December 31, 2015?
5. What is the balance of the Estimated Warranty Liability account as of January 31, 2016?

Explanation / Answer

1.1 & 1.2 Journal Entry S. No. Account & Explanation Debit Credit 11/11/2015 Cash $6,400.00 Sales $6,400.00 To Record Sales of 80 Razor Cost of Goods Sold $1,120.00 Merchandised Inventory $1,120.00 To Record Cost of 80 Razor Sold @$14 30/11/2015 Warranty Expense $448.00 Estimated Warranty liability $448.00 To Record Warranty expense @7% on Sales 09/12/2015 Estimated Warranty liability $224.00 Merchandised Inventory $224.00 To Record replacement of 16 Razor 16/12/2015 Cash $19,200.00 Sales $19,200.00 To Record Sales of 240 Razor Cost of Goods Sold $3,360.00 Merchandised Inventory $3,360.00 To Record Cost of 240 Razor Sold @$14 Warranty Expense $1,344.00 Estimated Warranty liability $1,344.00 To Record Warranty expense @7% on Sales 29/12/2015 Estimated Warranty liability $448.00 Merchandised Inventory $448.00 To Record replacement of 32 Razor 05/01/2016 Cash $12,800.00 Sales $12,800.00 To Record Sales of 160 Razor Cost of Goods Sold $2,240.00 Merchandised Inventory $2,240.00 To Record Cost of 160 Razor Sold @$14 Warranty Expense $896.00 Estimated Warranty liability $896.00 To Record Warranty expense @7% on Sales 29/12/2016 Estimated Warranty liability $518.00 Merchandised Inventory $518.00 To Record replacement of 37 Razor 2. Warrnaty expenses reported for Nov 2015 & Dec2015 Sales Made in November 2015 $6,400 Expected Warranty Cost 7% of dollar Sales Warranty expenses reported for Nov 2015 $448.00 ($6400*7%) Sales Made in December 2015 $19,200 Expected Warranty Cost 7% of dollar Sales Warranty expenses reported for Dec 2015 $1,344.00 ($19200*7%) 3.. Warrnaty expenses reported in Jan2016 Sales Made in January 2016 $12,800 Expected Warranty Cost 7% of dollar Sales Warranty expenses reported for Jan2016 $896.00 ($12800*7%) 4. Balance of Estimated Warranty Liability as of 31, Dec 2015 30-Nov-15 Estimated Warranty Liability recorded $448.00 09-Dec-15 Actual Warranty Expenses incurred(16 Razor *$14) -$224.00 16-Dec-15 Estimated Warranty Liability recorded $1,344.00 29-Dec-15 Actual Warranty Expenses incurred(32 Razor *$14) -$448.00 31-Dec-15 Balance of Estimated warranty Liability recorded $1,120.00 5. Balance of Estimated Warranty Liability as of 31, Dec 2016 01-Jan-16 Begining Balance of Estimated Warranty liability $1,120.00 05-Jan-16 Estimated Warranty Liability recorded $896.00 17-Jan-16 Actual Warranty Expenses incurred(37 Razor *$14) -$518.00 31-Dec-16 Balance of Estimated warranty Liability recorded $1,498.00

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