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.
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.
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 re-deemed.
Garison’s total sales for 2020 were $7,200,000—$5,700,000 from musical instruments and sound reproduction equipment and $1,500,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled $94,000 during 2020 ($44,000 of the work is related to pre-2020 sales). A total of 6,500 players used in the premium program were purchased during the year and there were 1,200,000 coupons re-deemed in 2020.
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 $ 37,600Estimated Premium Claims Outstanding 44,800Estimated Liability from Warranties 136,000Instructions
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 ExpenseSale of Musical Instruments $7,200,000Sale of Sound reproduction equipment $5,700,000Total Sales $12,900,000Warranty Expense 2% of sales $258,0002) Estimated Liability from WarrantiesBeginning Balance $136,000Add: Addition for the year $258,000Total $394,000Less: Expense incurred $164,000Ending Balance on $230,000December 31, 2010 =======3) Premium ExpenseSale of recorded music and sheet music $1,500,000Coupons issued at one coupon for one dollar 1,500,000CD Players to be release at one for 200 coupons = 4,500Premium Expense of CD players at $12 ($32 - $20) =$54,0004) Inventory of CD PlayersBeginning Balance 1,175 units $37,600Purchased during the year 6,500 units $208,000Total available 7675 units $245,600Less: issued for redemption 6,000 units $192,000Ending Balance 1,675 units $ 53,6005) Estimated Premium Claims outstandingBeginning Balance $44,800Add: Claims for the year(60% of the current sales) $54,000Total $98,800Less: Redeemed during the year $72,000Ending balance $26,800