Garison Music Emporium carries a wide variety of musical instruments, sound repr

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.

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 300 coupons and $20 for a digital MP3 player. Garison pays $32 for each player and estimates that 60% of the coupons given to customers will be redeemed.

Garison’s total sales for 2014 were $7,356,000—$5,850,000 from musical instruments and sound reproduction equipment and $1,506,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled $170,100 during 2014. A total of 7,030 players used in the premium program were purchased during the year, and there were 1,420,000 coupons redeemed in 2014.

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, 2014, were as shown below.

Garison Music Emporium is preparing its financial statements for the year ended December 31, 2014. Determine the amounts that will be shown on the 2014 financial statements for the following. (Round answers to 0 decimal places, e.g. 125.)

Inventory of Premiums $ 37,940 Premium Liability 45,280 Warranty Liability 142,800

Explanation / Answer

Part a)

The warranty expense can be calculated with the use of following formula:

Warranty Expense = Total Sales Value of Musical Instruments and Sound Reproduction Equipment*Estimated Warranty Cost Percentage

_________

Using the values provided in the question, we get,

Warranty Expense = (7,356,000 + 5,850,000)*2% = $264,120

_________

Part b)

The Warranty Liability has been calculated with the use of following table:

_________

Part c)

The Premium Expense has been calculated with the use of following table:

_________

Part d)

The Inventory of Premiums has been calculated with the use of following table:

_________

Part e)

The Premium Liability has been calculated with the use of following formula:

Warranty Liability as on 1st January 2014 142,800 Add Warranty Expenses for 2014 (from Part a) 264,120 Less Replacement Parts and Labor for Warranty Work during 2014 170,100 Warranty Liability as on 31st December 2014 $236,820

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