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Problem 13-12 Sunland Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded...

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 $

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Expert Solution

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

ekkarill92 answered 1 year ago
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