Problem
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 $13 and its retail selling price is $70 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 80 razors for $5,600 cash.
30 Recognized warranty expense related to November sales with an adjusting entry.
Dec. 9 Replaced 16 razors that were returned under the warranty.
16 Sold 240 razors for $16,800 cash.
29 Replaced 32 razors that were returned under the warranty.
31 Recognized warranty expense related to December sales with an adjusting entry.
2013
Jan. 5 Sold 160 razors for $11,200 cash.
17 Replaced 37 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 above transactions and adjustments for 2012.
1.2 Prepare journal entries to record above transactions and adjustments for 2013.
2. How much warranty expense is reported for November 2012 and for December 2012?
3. How much warranty expense is reported for January 2013?
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?