Question
On November 10, 2015, Brown Co. began operations by purchasing TVS for resale. Lee uses the perpetual inventory method. The TVs have a 60-day warranty
On November 10, 2015, Brown Co. began operations by purchasing TVS for resale. Lee uses the perpetual inventory method. The TVs have a 60-day warranty that requires the company to replace any nonworking TVS. When a TV is returned, the company discards it and mails a new one from Merchandise Inventory to the customer. The companys cost per new TVs is $24 and its retail selling price is $50 in both 2015 and 2016. The manufacturer has advised the company to expect warranty costs to equal 10% of dollar sales. The following transactions and events occurred.
2015
Nov. 16 Sold 50 TVs for $2,500 cash.
30 Recognized warranty expense related to November sales with an adjusting entry.
Dec. 12 Replaced six Tvs that were returned under the warranty.
18 Sold 200 TVs for $10,000 cash.
28 Replaced 17 TVs that were returned under the warranty.
31 Recognized warranty expense related to December sales with an adjusting entry.
2016
Jan. 7 Sold 40 TVs for $2,000 cash.
21 Replaced 36 TVS 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 2015 and 2016.
2. How much warranty expense is reported for November 2015 and for December 2015?
3. How much warranty expense is reported for January 2016?
4. What is the balance of the Estimated Warranty Liability account as of December 31, 2015?
5. What is the balance of the Estimated Warranty Liability account as of January 31, 2016?
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