On November 10, Lee Co. began operations by purchasing coffee grinders for resale. The grinders have a 60-day warranty. When a grinder is returned, the company discards it and mails a new one from merchandise inventory to the customer. The company’s cost per new grinder is $24 and its retail selling price is $50.
The company expects warranty costs to equal 10% of dollar sales. The following transactions occurred.
Nov. 16. Sold 50 grinders for $2,500 cash.
30. Recognized warranty expense related to November sales with an adjusting entry.
Dec. 12. Replaced six grinders that were returned under the warranty.
18. Sold 200 grinders for $10,000 cash.
28. Replaced 17 grinders that were returned under the warranty.
31. Recognized warranty expense related to December sales with an adjusting entry.
Jan. 7. Sold 40 grinders for $2,000 cash.
21. Replaced 36 grinders 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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