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 $14 and its retail selling price is $80 in both 2010 and 2011. The manufacturer has advised the company to expect warranty costs to equal 6% of dollar sales. The following transactions and events occurred.
- Nov. 11 Sold 70 razors for $5,600 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 $16,800 cash.
- 29 Replaced 28 razors that were returned under the warranty.
- 31 Recognized warranty expense related to December sales with an adjusting entry.
- Jan. 5 Sold 140 razors for $11,200 cash.
- 17 Replaced 33 razors that were returned under the warranty.
- 31 Recognized warranty expense related to January sales with an adjusting entry.
1. Prepare journal entries to record above 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?