On October 29, 2014, Lobo Company 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 $13 and its retail selling price is $70 in both 2014 and 2015. The manufacturer advised the company to expect warranty costs to equal 7% of dollar sales. The following transactions and events occured: (Attached)

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?

ANSWERS 2014 Journal entries November 11 date General journal Nov 11 Cash Sales (to record sale of razors) debi t 350 0 credi t 3500 November 30 Date General Journal Nov 30 Debi t 245 Warranty expense estimated warrant liability (to record warranty expense recognized) Credi t 245 Warranty expense = 7%*3500 Date General journal Dec 09 estimated warrant liability inventory (To record return and replacement of 10 razor blades) debi t 130 credi t 130 December 16 Date General journal Debit Dec 16 Cash 1050 Sales 0 (To record sale of 150 razors) Credi t 1050 0 December 29 Date General journal Dec estimated warrant liability Debi t 260 Credi t 29 inventory (To record the return and replacement of 20 razors under warranty) December 31 Date General Journal Dec 31 Debi t 98 Warrant Expense Estimated warrant liability (adjusting entry for warrant expense) Credi t 98 2015 Journal entries Jan 05 Sale of 100 razors Dates General journal Date Jan 05 Cash Sales (to record sale of 100 razors on cash basis) 700 0 Date General journal Jan 05 Cost of goods Inventory (to record the cost of goods sold) debi t 130 0 Credi t 7000 credi t 1300 Cost of goods sold =13*100 =$1300 January 17 Date General journal Jan 17 Estimated warrant liability Inventory debi t 325 credi t 325 260 (to record replacement of the returned razors) Inventory reduces by 13*25 =$325 Date Jan 31 General journal debit Warrant expense 122.5 Estimated warrant liability 0 (To record adjusting entry for warranty expense) credit 122.5 0 1. What is the balance of the Estimated Warranty liability account as of Dec 31, 2014? 2. What is the balance of the Estimated Warranty Liability account as of January 31, 2015