On October 29, Lobo Co. began operations by purchasing razors for resale. The razors have a 90-day warranty. 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 $20 and its retail selling price is $75. The company expects warranty costs to equal 8% of dollar sales. The following transactions occurred.
Nov. 11. Sold 105 razors for $7,875 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 $16,500 cash.
29. Replaced 30 razors that were returned under the warranty.
31. Recognized warranty expense related to December sales with an adjusting entry.
Jan. 5. Sold 150 razors for $11,250 cash.
17. Replaced 50 razors that were returned under the warranty.
31. Recognized warranty expense related to January sales with an adjusting entry.
Required
1. Prepare journal entries to record these transactions and adjustments.
2. How much warranty expense is reported for November and for December?
3. How much warranty expense is reported for January?
4. What is the balance of the Estimated Warranty Liability account as of December 31?
5. What is the balance of the Estimated Warranty Liability account as of January 31?
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