Question

Garison Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. Garison uses two sales promotion techniques— warranties and premiums— to attract customers.
Below is the information to answer the required question.
a. Musical instruments and sound equipment are sold with a one- year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales.
b. The premium is offered on the recorded and sheet music. Customers receive a coupon for each dollar spent on recorded music or sheet music. Customers may exchange 200 coupons and $ 20 for a CD player. Garison pays $ 32 for each CD player and estimates that 60% of the coupons given to customers will be redeemed.
c. Garison’s total sales for 2010 were $ 7,200,000—$ 5,700,000 from musical instruments and sound reproduction equipment and $ 1,500,000 from recorded music and sheet music.
d. Replacement parts and labor for warranty work totaled $ 164,000 during 2010.
e. A total of 6,500 CD players used in the premium program were purchased during the year and there were 1,200,000 coupons redeemed in 2010.
f. The accrual method is used by Garison to account for the warranty and premium costs for financial reporting purposes.
The balances in the accounts related to warranties and premiums on January 1, 2010, were as shown below.
Inventory of Premium CD Players $ 37,600
Estimated Premium Claims Outstanding 44,800
Estimated Liability from Warranties 136,000
Question:
(a) Garison Music Emporium is preparing its financial statements for the year ended December 31, 2010. Determine the amounts that will be shown on the 2010 financial statements for the following.
(1) Warranty Expense -
(2) Estimated Liability from Warranties -
(3) Premium Expense -
(4) Inventory of Premium CD Players -
(5) Estimated Premium Claims Outstanding -

Answer 1

Answer:

Explanation:

(a)

Given:

Warranty exp = 2% of musical instrument & sound equipment

Calculation:

Warranty exp = Warranty exp * 5,424,000

Warranty exp = 2% * 5,424,000

Warranty exp = 108,480

(b)

Warranty liability as on December 2017 = Opening Balance + Warranty Expense - Warranty Claim

Warranty liability as on December 2017 = 138,000 + 108,480 - 156,400

Warranty liability as on December 2017 = $90,080

(c)

The customer receives one coupon for each dollar spend 2,138,000 only 50% coupon will be redeemed.

Exp provision liability created = 50% * 2,138,000

Exp provision liability created = 1,069,000

Customer can exchange 200 coupon & $30 for MP3 player which is purchase for 42 that mean 200 coupon will be for 12 i.e. (42-30) value of coupon will be

12

200

= 0.06.

Value of 1,069,000 coupon = 1,069,000 * 0.06

Value of 1,069,000 coupon = 64,140

(d)

1,138,000 coupons had been redeemed during the year each MP3 player required 200 coupons.

N

o

o

f

M

P

3

p

l

a

y

e

r

o

f

f

e

r

e

d

=

1

,

138

,

000

200

N

o

o

f

M

P

3

p

l

a

y

e

r

o

f

f

e

r

e

d

=

5

,

690

M

P

3

p

l

a

y

e

r

Cost = 5,690 * 42

Cost = 238,980

Inventory Premium = Opening Balance + Purchases - Utilized Redeemed Coupon

Inventory Premium = 39,210 + (7,010 * 42) - 238,980

Inventory Premium = 39,210 + 294,420 - 238,980

Inventory Premium = $94,650

(e)

Premium liability balance = Opening Balance + Premium Exp Provision - Coupon Redeemed

Premium liability balance = 41,670 + 64,140 - (1,138,000 * 0.06)

Premium liability balance = 41,670 + 64,140 - 68,280

Premium liability balance = 37,530