Problem
A Warranty expense and liability estimation
[The following information applies to the questions displayed below.]
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 $80 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 50 razors for $4,000 cash.
30 Recognized warranty expense related to November sales with an adjusting entry.
Dec. 9 Replaced 10 razors that were returned under the warranty.
16 Sold 150 razors for $12,000 cash.
29 Replaced 20 razors that were returned under the warranty.
31 Recognized warranty expense related to December sales with an adjusting entry.
2013
Jan. 5 Sold 100 razors for $8,000 cash.
17 Replaced 25 razors that were returned under the warranty.
31 Recognized warranty expense related to January sales with an adjusting entry.
Part 1
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.
Part 2
2. How much warranty expense is reported for November 2012 and for December 2012?
Part 3
3. How much warranty expense is reported for January 2013?
Part 4
4. What is the balance of the Estimated Warranty Liability account as of December 31, 2012?
Part 5
5. What is the balance of the Estimated Warranty Liability account as of January 31, 2013?