Accounting 1080 Problem 2-A Lue Co

On October 29, 2010, Lue Co. began operations by purchasing razors for resale. Lue 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 $18 and its retail selling price is $80 in both 2010 and 2011. The manufacturer has advised the company to expect warranty costs to equal 7% of dollar sales. The following transactions and events occurred.

  

Required

  

1.Prepare journal entries to record these transactions and adjustments for 2010 and 2011.

 

2.How much warranty expense is reported for November 2010 and for December 2010?

 

3.How much warranty expense is reported for January 2011?

 

4.What is the balance of the Estimated Warranty Liability account as of December 31, 2010?

  

5.What is the balance of the Estimated Warranty Liability account as of January 31, 2011?