Question

Waterway Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. Waterway uses two sales promotion techniques—warranties and premiums—to attract customers.

Musical instruments and sound equipment are sold with a 1-year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 1% 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 $30 for an MP3 player. Waterway pays $42 for each player and estimates that 70% of the coupons given to customers will be redeemed.

Waterway’s total sales for 2020 were $6,978,000—$6,014,000 from musical instruments and sound reproduction equipment and $964,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled $97,000 during 2020 ($44,500 of the work is related to pre-2020 sales). A total of 6,920 players used in the premium program were purchased during the year and there were 1,192,000 coupons redeemed in 2020.

The balances in the accounts related to warranties and premiums on January 1, 2020, were as shown below.

Premium Inventory		$ 37,870
Premium Liability		40,870
Warranty Liability		58,300

Waterway Music Emporium is preparing its financial statements for the year ended December 31, 2020. Determine the amounts that will be shown on the 2020 financial statements for the following.

(a)		Warranty Expense		$
(b)		Warranty Liability		$
(c)		Premium Expense		$
(d)		Premium Inventory		$
(e)		Premium Liability		$

Answer 1

a) Warranty Expense

Sales of musical instruments and sound equipment = 6,014,000

Warranty expense = 6,014,000 x 1% = 60,140

b)Warranty Liability

Opening Balance	58,300.00
Warranty Expense(As Above)	60,140.00
Actual Warranty Cost	- 97,000.00
Warranty Liability	21,440.00

c)

Estimated number of coupons to be redeemed	674,800.00
Estimated number of premium players to be issued	3,374.00
Net cost of players	12.00
Premium expense	40,488.00

d)

Opening Balance	37,870.00
Premium Players Purchase	290,640.00
Exchange for Coupons	250,320.00
Premium Inventory	78,190.00

e)

Estimated Liability	40,870.00
Premium Expense	40,488.00
Actual Redemption	71,520.00
Premium Liability	9,838.00