Question

Yamaha sells guitar and also offers guitar lessons. Normally, one of the guitar sells for $2,200. This period, yamaha has offered a special coupon with the purchase of a guitar at full price to receive the first 10 guitar lessons free (normally a $300 value….lessons will begin in December). yamaha has estimated a 50% redemption rate on the coupon. Customers will also receive five free sets of guitar string (normally $8 per set) with the purchase of a full price yamha guitar (strings are shipped with the guitar). On October 20, an order for 100 guitar was placed and payment was made. The guitar were delivered on November 1.

• Prepare all the necessary journal entries on October 20 and November 1 ( show caculation)

Answer 1

Answer:

Sales = 100 guitar × $2,200 per guitar = $220,000

Giving five free sets of guitar string along with the guitar is to be recorded as 'Promotion expense'

Hence promotion expense = 100 guitar × 5 sets of string × $8 per set =$4,000

Giving special coupon to receive first 10 guitar lessons free is to be recorded as 'Deferred promotion expense' til it is redeemed by the customer. Company expect 50% redemption in this case.

Deferred promotion expense = 100 guitar × $300 × 50% = $15,000

GENERAL JOURNAL Date Account Cash Oct.20 Advance against order-guitar Advance against order-guitar Promotion expense Nov.01 Deferred promotion expense Sales Current Liability Debit (US $) Credit (US $) 220,000 2,20,000 220,000 4,000 15,000 220,000 19,000

Note:-The deferred promotion expense will be transferred to promotion expense in December based on redemption by the customers.

Company would also be required to make subsequent adjusting entries if the redemption rate did not align with the estimates.

Revenue for sale is recognized when actual delivery of goods is given to customer.