On November 10, 2009, Lorna Co. began operations by purchasing coffee grinders for resale. Lorna uses the perpetual inventory method. The grinders have a 90-day warranty that requires the company to replace any nonworking grinder. 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 $15 and its retail selling price is $85 in both 2009 and 2010. The manufacturer has advised the company to expect warranty costs to equal 8% of dollar sales. The following transactions and events occurred.
2009
Nov. 16 Sold 50 grinders for $4,250 cash.
30 Recognized warranty expense related to November sales with an adjusting entry.
Dec. 12 Replaced 11 grinders that were returned under the warranty.
18 Sold 160 grinders for $13,600 cash.
28 Replaced 22 grinders that were returned under the warranty.
31 Recognized warranty expense related to December sales with an adjusting entry.
2010
Jan. 7 Sold 95 grinders for $8,075 cash.
21 Replaced 45 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 for 2009 and 2010.
2. How much warranty expense is reported for November 2009 and for December 2009?
3. How much warranty expense is reported for January 2010?
4. What is the balance of the Estimated Warranty Liability account as of December 31, 2009?
5. What is the balance of the Estimated Warranty Liability account as of January 31, 2010?