Question

Problem 13-12 Sunland Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. Sunland 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 $10 for an MP3 player. Sunland pays $21 for each player and estimates that 50% of the coupons given to customers will be redeemed. Sunland’s total sales for 2017 were $6,824,000—$6,010,000 from musical instruments and sound reproduction equipment and $814,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled $153,400 during 2017. A total of 5,960 players used in the premium program were purchased during the year and there were 1,102,000 coupons redeemed in 2017. The balances in the accounts related to warranties and premiums on January 1, 2017, were as shown below. Inventory of Premiums $ 36,310 Premium Liability 42,300 Warranty Liability 147,800 Sunland Music Emporium is preparing its financial statements for the year ended December 31, 2017. Determine the amounts that will be shown on the 2017 financial statements for the following. (Round answers to 0 decimal places, e.g. 125.) (a) Warranty Expense $ (b) Warranty Liability $ (c) Premium Expense $ (d) Inventory of Premiums $ (e) Premium Liability $

Answer 1

a) Warranty expenses 2017

warranty exp = 2% of musical instrument & sound equipment

warranty exp = 2%x6010000 = 120200

b) Warranty laibility as on december 2017

Opening balance +warranty exp- warranty claim

147800+120200-153400 = 114600

c) Premium Expenses for year 2017

in the above question customer receceive one coupon for each dollor spend on

recorded music or sheet music sale therefore sale = 814000 only 50% coupon will be redeemed

Therefore exp provision laibilty created = 50%*814000= 407000

Customer can exchange 200 coupon & 10 for MP3 player which is purchase for 21

that mean 200 coupon will be for 11 i.e. (21-10) value of coupon will be 11/200= 0.055

therefore value of 407000 coupon will be (407000*0.055) = 22385

d) Inventory of premium on December 2017

According to the question 1102000 coupon had been redeemed during the year

each MP3 player required 200 coupon

therefore no of MP3 player offered = 1102000/200 = 5510 MP3 player

cost of these MP3 IS 21 = (5510*21) = 115710

Inventory of premium = opening balance+purchase-utilised for redeem coupon i.e 1102000

36310+(5960 MP3 *21)-115710

45760

e) Premium laibility balance

Opening balance +premium exp provision as per [c] part -value of coupon redeem

42300+22385- (1102000*0.055 value of each coupon)

42300+22385-60610

4075