On October 29, 2010, Lue Co. began operations by purchasing razors for resale. Lue 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 $18 and its retail selling price is $80 in both 2010 and 2011. The manufacturer has advised the company to expect warranty costs to equal 7% of
dollar sales. The following transactions and events occurred.
2010
Nov. 11 Sold 75 razors for $6,000 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 210 razors for $16,800 cash.
29 Replaced 30 razors that were returned under the warranty.
31 Recognized warranty expense related to December sales with an adjusting entry.
2011
Jan. 5 Sold 130 razors for $10,400 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 2010 and 2011.
2. How much warranty expense is reported for November 2010 and for December 2010?
3. How much warranty expense is reported for January 2011?
4. What is the balance of the Estimated Warranty Liability account as of December 31, 2010?
5. What is the balance of the Estimated Warranty Liability account as of January 31, 2011?