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 S20 and its retail selling price is S75 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 105 razors for S7,875 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 220 razors for S16,500 cash.
29 Replaced 30 razors that were returned under the warranty.
31 Recognized warranty expense related to December sales with an adjusting entry.

2013
Jan. 5 Sold 150 razors for S11,250 cash.
17 Replaced 50 razors that were returned under the warranty.
31 Recognized warranty expense related to January sales with an adjusting entry.

Required:
a. Prepare journal entries to record these transactions and adjustments for 2012 and 2013.
b. How much warranty expense is reported for November 2012 and for December 2012?
c. How much warranty expense is reported for January 2013?
d. What is the balance of the Estimated Warranty Liability account as of December 31, 2012?

Answer 1

Answer:

a. See the attached excel file for the journal entries for 2012 and 2013.

b. We have the following:

Warranty Expense reported for November 2012 = $630

Warranty Expense reported for December 2012 = $1,320

Total Warranty Expense reported for 2012 = $1,950

c. Warranty Expense reported for January 2013 = $900

d. Balance of the Estimated Warranty Liability account as of December 31, 2012 = $1,050

Explanation:

a. Prepare journal entries to record these transactions and adjustments for 2012 and 2013.

Note: See the attached excel file for the journal entries for 2012 and 2013.

In the attached excel, the following workings are used:

w.1: Cost of Goods Sold = Units sold * Cost per unit = 105 * $20 = $2,100

w.2: Warranty Expense = Sales * 8% = $7,875 * 8% = $630

w.3: Estimated Warranty Liability = Units replaced * Cost per unit = 15 * $20 = $300

w.4: Cost of Goods Sold = Units sold * Cost per unit = 220 * $20 = $4,400

w.5: Estimated Warranty Liability = Units replaced * Cost per unit = 30 * $20 = $600

w.6: Warranty Expense = Sales * 8% = $16,500 * 8% = $1,320

w.7: Cost of Goods Sold = Units sold * Cost per unit = 150 * $20 = $3,000

w.8: Estimated Warranty Liability = Units replaced * Cost per unit = 50 * $20 = $1,000

w.9: Warranty Expense = Sales * 8% = $11,250 * 8% = $900

b. How much warranty expense is reported for November 2012 and for December 2012?

Warranty Expense reported for November 2012 = Sales for November 2012 * 8% = $7,875 * 8% = $630

Warranty Expense reported for December 2012 = Sales for December 2012 * 8% = $16,500 * 8% = $1,320

Total Warranty Expense reported for 2012 = Reported Warranty Expense for November 2012 + Reported Warranty Expense for December 2012 = $630 + $1,320 = $1,950

c. How much warranty expense is reported for January 2013?

Warranty Expense reported for January 2013 = Sales for January 2013 * 8% = $11,250 * 8% = $900

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

Total Warranty Expense reported for 2012 = $1,950

Value of returned 15 razors replaced on Dec. 9, 2012 = Units replaced * Cost per unit = 15 * $20 = $300

Value of returned 30 razors replaced on Dec. 29, 2012 = Units replaced * Cost per unit = 30 * $20 = $600

Total value of returned razors replaced in 2012 = Value of returned 15 razors replaced on Dec. 9, 2012 + Value of returned 30 razors replaced on Dec. 29, 2012 = $300 + $600 = $900

Therefore, we have:

Balance of the Estimated Warranty Liability account as of December 31, 2012 = Total Warranty Expense reported for 2012 - Total value of returned razors replaced in 2012 = $1,950 - $900 = $1,050

Download xlsx