Question

Question 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.

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

Short answer

Answer

1. The warranty expense is debited, and the estimated warranty liability is credited to record the estimated warrant expense.
2. The reported warranty expense for November and December 2016 are$630 and$1320, respectively.
3. The warranty expense reported for January 2017 is$900
4. The estimated warranty liability balance as of December 31, 2016, is$1,050
5. The estimated warranty liability balance as of January 31, 2017, is$950

Step-by-step solution

Meaning of Warranty

Warranty refers to the sellers' liability to replace or give a new product to the customers if the product is not up to the mark within a specified time.

Journal entries

Date	Particulars	Debit ($)	Credit($)
2016
Nov. 11	Cash	7,875
	Sales		7,875
	(To record the sale)
Nov. 11	Cost of Goods Sold (105x $20)	$2,100
	Merchandise Inventory		$2,100
	(To record the cost of goods sold)
Nov. 30	Warranty Expense (7,857x 8%)	630
	Estimated Warranty Liability		630
	(To record estimated warrant expense)
Dec. 9	Estimated Warranty Liability (105x $20)	300
	Merchandise Inventory		300
	(To record cost of warranty repairs)
Dec. 16	Cash	16,500
	Sales		16,500
	(To record the sale of a razor)
Dec. 29	Estimated Warranty Liability (30x $20)	600
	Merchandise Inventory		600
	(To record cost of warranty repairs)
Dec. 31	Warranty Expense (16,500 x 8%)	1,320
	Estimated Warranty Liability		1,320
	(To record estimated warrant expense)
2017
Jan. 5	Cash (150x $20)	11,250
	Sales		11,250
	(To record the sale)
Jan. 5	Cost of Goods Sold (50x $20)	$3,000
	Merchandise Inventory		$3,000
	(To record the cost of goods sold)
Jan. 17	Estimated Warranty Liability	1,000
	Merchandise Inventory		1,000
	(To record the cost of warranty repairs)
Jan. 31	Warranty Expense (11,250 x 8%)	900
	Estimated Warranty Liability		900
	(To recognize razors under warranty)

Warranty expense for November and December 2016

The warranty expense for November 2016 is $630.

The warranty expense for December 2016 is $1,320

Warranty expense for January month

The warranty expense for January month is $900

Balance of estimated warranty expense on December 31, 2016

Particulars	Amount
Warranty expense for November	$630
Warranty expense for December	$1,320
Less: Cost of replacement ($300+$600)	($900)
Estimated warranty liability	$1,050

Balance of estimated warranty expense on January 31, 2016

Particulars	Amount
Estimated warranty liability December 31, 2016	$1,050
Warranty expense for January	$900
Less: Cost of replacement	($1,000)
Estimated warranty Liability on January 31, 2017	950