On October 29, 2014, Lobo Co. began operations by purchasing razors for resale.

Question

On October 29, 2014, 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 $15 and its retail selling price is $60 in both 2014 and 2015. The manufacturer has advised the company to expect warranty costs to equal 6% of dollar sales. The following transactions and events occurred. 2014 Nov. 11 Sold 70 razors for $4,200 cash. 30 Recognized warranty expense related to November sales with an adjusting entry. Dec. 9 Replaced 14 razors that were returned under the warranty. 16 Sold 210 razors for $12,600 cash. 29 Replaced 28 razors that were returned under the warranty. 31 Recognized warranty expense related to December sales with an adjusting entry. 2015 Jan. 5 Sold 140 razors for $8,400 cash. 17 Replaced 33 razors that were returned under the warranty. 31 Recognized warranty expense related to January sales with an adjusting entry. 1.1 Prepare journal entries to record these transactions and adjustments for 2014. 1.2 Prepare journal entries to record these transactions and adjustments for 2015.

Explanation / Answer

Prepare journal entries to record these transactions and adjustments for 2014

1.2 Prepare journal entries to record these transactions and adjustments for 2015.

2)

Warranty Expenses is reported for November 2014 = 4200*6% = 252

Warranty Expenses is reported for December 2014 = 12600*6% = 756

warranty expense is reported for January 2015 = 8400*6% = 504

Estimated Warranty Liability account as of December 31, 2014 = Waranty Liability created on Nov 30 - Warranty Liabilty used in Dec 9 - Warranty Liabilty used in Dec 29 + Waranty Liability created on Dec 31

Estimated Warranty Liability account as of December 31, 2014 = 252-210 - 420 + 756

Estimated Warranty Liability account as of December 31, 2014 = 378

Estimated Warranty Liability account as of January 31, 2015 = Estimated Warranty Liability account as of December 31, 2014 + Warranty Liabity created in jan - Warranty Liability used in jan

Estimated Warranty Liability account as of January 31, 2015 = 378+504 - 495

Estimated Warranty Liability account as of January 31, 2015 = 387

Date Account Title & Explaination Debit Credit 2014 Nov. 11 Cash 4200 Sale 4200 Cost of Good Sold 1050 Inventory 1050 Nov 30 Warranty Expenses (4200*6%) 252 Warranty Liability 252 Dec. 9 Warranty Liability (14*15) 210 Inventory 210 Dec 16 Cash 12600 Sale 12600 Cost of Good Sold (210*15) 3150 Inventory 3150 Dec 29 Warranty Liability (28*15) 420 Inventory 420 Dec 31 Warranty Expenses (12600*6%) 756 Warranty Liability 756

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