perpetual inventory method
Question
On October 29, 2014, 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 $14 and its retail selling price is $90 in both 2014 and 2015. The manufacturer has advised the company to expect warranty costs to equal 6% of dollar sales. The following transactions and events occurred.
| 2014 |
| Nov. | 11 | Sold 70 razors for $6,300 cash. |
| 30 | Recognized warranty expense related to November sales with an adjusting entry. | |
| Dec. | 9 | Replaced 14 razors that were returned under the warranty. |
| 16 | Sold 210 razors for $18,900 cash. | |
| 29 | Replaced 28 razors that were returned under the warranty. | |
| 31 | Recognized warranty expense related to December sales with an adjusting entry. |
| 2015 |
| Jan. | 5 | Sold 140 razors for $12,600 cash. |
| 17 | Replaced 33 razors that were returned under the warranty. | |
| 31 | Recognized warranty expense related to January sales with an adjusting entry. |
Required information
| 1.1 | Prepare journal entries to record these transactions and adjustments for 2014. |
| 1.2 | Prepare journal entries to record these transactions and adjustments for 2015. |
| 2. | How much warranty expense is reported for November 2014 and for December 2014? |
| 3. | How much warranty expense is reported for January 2015? |
| 4. | What is the balance of the Estimated Warranty Liability account as of December 31, 2014? |
| 5. | What is the balance of the Estimated Warranty Liability account as of January 31, 2015? |
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