Question

In: Accounting

You have been asked to direct Alberto Company in the proper accounting treatment for two of its new customer relations plans.

 

You have been asked to direct Alberto Company in the proper accounting treatment for two of its new customer relations plans.

1.     Alberto has offered for sale a complete computer system for $1,400 under a 12-month warranty agreement that requires the company to replace all defective parts and to provide the repair labor at no cost to the customers. Alberto sold 720 systems during 2018 with sales being made evenly throughout the year (approximately 60 systems per month). The company estimates that about 25% of the customers will exercise the warranty and that the cost to the company will be about $370 per system.

2.     To stimulate sales of computer games, Alberto places a $10 coupon in each game. Five coupons are redeemable for a special game available only by redeeming the coupons. In 2018, Alberto purchased 40,000 special games for $15.00 each from its manufacturer. Alberto sold 440,000 games with coupons at an average price of $37.50 per game. Alberto estimates that 40% of the coupons issued will be redeemed. During 2018, 105,000 coupons are presented for redemption.

Required:

a)     What journal entries will Alberto need to make in 2018 relative to these plans?

b)     What amounts, if any, will be disclosed in Alberto’s financial statements and where will they appear?

Solutions

Expert Solution

a)

No. Account Titles and Explanation Debit Credit
1 Cash/Accounts receivable 1008000
Sales revenue (720 x $1400) 1008000
(To record sales)
Warranty expense (720 x 25% x $370) 66600
Warranty payable 66600
(To record warranty expense)
2 Premium inventory (40000 x $15) 600000
Cash/Accounts payable 600000
(To record purchase of premium inventory of special game)
Cash/Accounts receivable 16500000
Sales revenue (440000 x $37.50) 16500000
(To record sales)
Premium expense 528000
Premium liability (440000 x 40% x 1/5 x $15) 528000
(To record premium expense accrued on games sold)
Premium liability 315000
Premium inventory (105000 x 1/5 x $15) 315000
(To record coupons redeemed)

b)

Warranty expense: $66600 in Income statement
Warranty payable: $66600 in Balance Sheet under Current Liabilities
Premium expense:$528000 in Income statement
Premium inventory: $285000 in Balance Sheet under Current Assets
Premium liability: $213000 in Balance Sheet under Current Liabilities

ekkarill92 answered 2 years ago
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