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Financial & Managerial Accounting
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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

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

See the step by step solution

Step by Step Solution

Step 1: 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.

Step 2: 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)

Step 3: Warranty expense for November and December 2016

The warranty expense for November 2016 is $630.

The warranty expense for December 2016 is $1,320

Step 4: Warranty expense for January month

The warranty expense for January month is $900

Step 5: 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

Step 6: 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

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