Problem 11-4A Warranty expense and liability estimation LO P4

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On October 29, 2012, 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 $16 and its retail selling price is $70 in both 2012 and 2013. The manufacturer has advised the company to expect warranty costs to equal 5% of dollar sales. The following transactions and events occurred.