Required information Problem 11-4A Warranty expense and liability estimation LO
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Required information
Problem 11-4A Warranty expense and liability estimation LO P4
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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 $14 and its retail selling price is $80 in both 2016 and 2017. The manufacturer has advised the company to expect warranty costs to equal 7% of dollar sales. The following transactions and events occurred.
2016
2017
Problem 11-4A Part 2
2. How much warranty expense is reported for November 2016 and for December 2016?
Nov. 11 Sold 50 razors for $4,000 cash. 30 Recognized warranty expense related to November sales with an adjusting entry. Dec. 9 Replaced 10 razors that were returned under the warranty. 16 Sold 150 razors for $12,000 cash. 29 Replaced 20 razors that were returned under the warranty. 31 Recognized warranty expense related to December sales with an adjusting entry.Explanation / Answer
Calculation of warranty expense: Sales X % of Warranty cost = Warranty Expense November 2016 $ 4,000 X 7% = $ 280 December 2016 $ 12,000 X 7% = $ 840 Total = $ 1,120
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