Question: On November 10, 2016, Lee Co. began operations by purchasing coffee grinders for resale. Lee uses the perpetual inventory method. The grinders have a 60-day warranty that requires the company to replace any nonworking grinder. When a grinder is returned, the company discards it and mails a new one from Merchandise Inventory to the customer. The company’s cost per new grinder is \(24 and its retail selling price is \)50 in both 2016 and 2017. The manufacturer has advised the company to expect warranty costs to equal 10% of dollar sales. The following transactions and events occurred.
2016
Nov. 16 Sold 50 grinders for \(2,500 cash.
30 Recognized warranty expense related to November sales with an adjusting entry.
Dec. 12 Replaced six grinders that were returned under the warranty.
18 Sold 200 grinders for \)10,000 cash.
28 Replaced 17 grinders that were returned under the warranty.
31 Recognized warranty expense related to December sales with an adjusting entry.
2017
Jan. 7 Sold 40 grinders for $2,000 cash.
21 Replaced 36 grinders that were returned under the warranty.
31 Recognized warranty expense related to January sales with an adjusting entry.
Required
1. Prepare journal entries to record these transactions and adjustments for 2016 and 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?
