Question

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?

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$250 and$1000, respectively.
3. The warranty expense reported for January 2017 is$200
4. The estimated warranty liability balance as of December 31, 2016, is$698
5. The estimated warranty liability balance as of January 31, 2017, is$34

Step-by-step solution

Meaning of Warranty

Warranty refers to the obligation of the seller to replace the product or correct the product if the product is not performing as mentioned within a particular period.

Journal entries

Date	Particulars	Debit ($)	Credit ($)
2016
Nov. 16	Cash	2,500
	Sales		2,500
	(To record the sale)
Nov. 16	Cost of Goods Sold (50 x $24)	1,200
	Merchandise Inventory		1,200
	(To record the cost of goods sold)
Nov. 30	Warranty Expense (2500x 10%	250
	Estimated Warranty Liability		250
	(To record estimated warrant expense)
Dec. 12	Estimated Warranty Liability (6 x $24)	144
	Merchandise Inventory		144
	(To record cost of warranty repairs)
Dec. 18	Cash	10,000
	Sales		10,000
	(To record the sale)
Dec. 28	Estimated Warranty Liability	408 (17 x $24)
	Merchandise Inventory		408
	(To record cost of warranty repairs)
Dec. 31	Warranty Expense ($10,000 X 10%)	1,000
	Estimated Warranty Liability		1,000
	(To record estimated warrant expense)
2017
Jan. 7	Cash	2,000
	Sales		2,000
	(To record the sale)
Jan. 7	Cost of Goods Sold (50X$24)	960
	Merchandise Inventory		960
	(To record the cost of goods sold)
Jan. 21	Estimated Warranty Liability (36 x$24)	864
	Merchandise Inventory		864
	(To record cost of warranty repairs)
Jan.31	Warranty Expense	200
	Estimated Warranty Liability(2000)		200
	(To record estimated warrant expense)

Calculation of warranty expense

The warranty expense for November 2016 is $250.

The warranty expense for December 2016 is $1,000.

Warranty expense for January month

The warranty expense for January month is $200.

Balance of estimated warranty expense on December 31, 2016

Particulars	Amount
Warranty expense for November	$250
Warranty expense for December	$1,000
Less: Cost of replacement ($144+$408)	($552)
Estimated warranty liability	$698