In October 29, 2016, Lobo Co. began operations by purchasing razors for resale.

Question

In 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 $13 and its retail selling price is $70 in both 2016 and 2017. The manufacturer has advised the company to expect warranty costs to equal 5% of dollar sales. The following transactions and events occurred.

2016

2017

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?

Nov. 11 Sold 70 razors for $4,900 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 $14,700 cash. 29   Replaced 28 razors that were returned under the warranty. 31   Recognized warranty expense related to December sales with an adjusting entry.

Explanation / Answer

1.1 journal entries to record above transactions and adjustments for 2016. Date Account Titles & Explanation debit credit Nov-11 cash A/c 4900         To Sales A/c 4900 Cost of goods sold A/c (70*$13) 910        To Inventory A/c 910 Recognized warranty expense related to November sales with an adjusting entry Nov-30 Warranty Expense A/c (4900*5%) 245         To Warranty payable A/c 245 Replaced 15 razors that were returned under the warranty Dec-09 Warranty payable A/c   (14*$13) 182 63            To Inventory A/c 182 Dec-16 cash A/c 14700         To Sales A/c 14700 Cost of goods sold A/c (210*$13) 2730        To Inventory A/c 2730 Dec-29 Warranty Expense A/c 301 Warranty payable A/c (245-182) 63              To Inventory A/c   (28*13) 364 Dec-31 Recognized warranty expense related to November sales with an adjusting entry Warranty Expense A/c   (14700*0.05 -301) 434         To Warranty payable A/c 434 1.2 journal entries to record above transactions and adjustments for 2017. Jan-05 cash A/c 9800         To Sales A/c 9800 Cost of goods sold A/c (140*$30) 1820        To Inventory A/c 1820 Jan-17 Warranty payable A/c 429              To Inventory A/c   (33*$13) 429 5 Jan-31 Recognized warranty expense related to November sales with an adjusting entry Warranty Expense A/c 490         To Warranty payable A/c (9800*0.05) 490 2 How much warranty expense is reported for November 2016 and for December 2016 Warrnaty expense for the November 2016 =$245 Warrnaty expense for the december 2016 =$301+$434 =$735 3 How much warranty expense is reported for January 2017 Warrnaty expense = $490 4 What is the balance of the Estimated Warranty Liability account as of December 31, 2016? warrnaty Liability = $434 5 What is the balance of the Estimated Warranty Liability account as January 2017 warrnaty Liability =$490+($434-$4290 =$495

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