On October 29, 2012, Lobo Co. began operations by purchasing razors for resale.

Question

On October 29, 2012, 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 $16 and its retail selling price is $90 in both 2012 and 2013. The manufacturer has advised the company to expect warranty costs to equal 8% of dollar sales. The following transactions and events occurred.

2012 Nov. 11 Sold 60 razors for $5,400 cash.

Nov. 30 Recognized warranty expense related to November sales with an adjusting entry.

Dec. 9 Replaced 12 razors that were returned under the warranty. 16 Sold 180 razors for $16,200 cash.

Dec. 29 Replaced 24 razors that were returned under the warranty. 31 Recognized warranty expense related to December sales with an adjusting entry.

2013 Jan. 5 Sold 120 razors for $10,800 cash.

Jan. 17 Replaced 29 razors that were returned under the warranty.

Jan. 31 Recognized warranty expense related to January sales with an adjusting entry.

4. What is the balance of the Estimated Warranty Liability account as of December 31, 2012?

4. What is the balance of the Estimated Warranty Liability account as of December 31, 2012?

5. What is the balance of the Estimated Warranty Liability account as of January 31, 2013? 60612730 1st Exam (40563 unread)-matt e Problem 113A Entries F MInbox (1,384)-matthjk Jobs & Internships P Log in to your PayPal a MCH 11 HW × x X × x × Dezto. mheducation.com/hm.tpx ABP value: Required Information 0.40 points Problem 11-4A Part 4 4. What is the balance of the Estimated Warranty Liability account as of December 31, 2012? stimated warranty liability balance 1,050 References eBook & Resources Worksheet Difficulty: Medium Problem 11-4A Part 4 Learning Objective: 11-P4 Account for estimated liabilities including warranties and bonuses Required Information alue 0.40 points Problem 11-4A Part 5 5. What is the balance of the Estimated Warranty Liability account as of January 31, 2013? Estimated warranty liability balance 3 6:54

Explanation / Answer

Answer:

Estimated Warranty Liability account as of december 31, 2012:

Warranty expense for Novemebr ($5400 sales X 8%) ..................................................................432 (credit)

Warranty expense for December ($16200 sales X 8%)................................................................1296 (credit)

Cost of replacing items in December [(12 razors+24 razors) X $16 per razor]..............................(576) (debit)

Liability balance..............................................................................................................................1152 (credit)

Estimated Warranty Liability account as of January 31, 2013:

Beginning balance...........................................................................................................................1152 (credit)

Warranty expense for January ($10800 sales X 8%)......................................................................864 (credit)

Cost of replacing items in January (29 razors X $16 per razor)......................................................(464) (debit)

Liability balance...............................................................................................................................1552 (credit)

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