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View Full Version : Warranty expense and Liability


ppeloso
Nov 13, 2012, 06:33 PM
On October 29, 2010, Lue Co. began operations by purchasing razors for resale. 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 $80 in both 2010 and 2011. The manufacturer has advised the company to expect warranty costs to equal 9% of dollar sales. The following transactions and events occurred. Lue uses the perpetual inventory method.

2010

Nov. 11 Sold 70 razors for $5,600 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 $16,800 cash.
29 Replaced 28 razors that were returned under the warranty.
31 Recognized warranty expense related to December sales with an adjusting entry.

2011

Jan. 5 Sold 140 razors for $11,200 cash.
17 Replaced 33 razors that were returned under the warranty.
31 Recognized warranty expense related to January sales with an adjusting entry

How do you find the warranty expense?

paraclete
Nov 13, 2012, 07:26 PM
I think there was something said about 9% of sales dollars so establish a provision and charge the expense of replacement to it, I would say 9% might not be enough based on percentage of actual numbers