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Question

Required information

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

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 $16 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

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

part 2

Warranty expense for November 2016 = 245 (4900*5%)

Warranty expense for December 2016 = 735 (14700*5%)

PArt 3

Warranty expense = 490 (9800*5%)

PART 4

Estimated warranty liability balance = $308

PART 5

Estimated warranty liability balance = 270

Warranty expense for November $ 245 credit   Warranty expense for December 735 credit   Cost of replacing items in December (42 × $16) (672 ) debit   Estimated warranty liability balance $ 308 credit

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