Question

P13.14 - Schmitt Company must make computations and adjust entries for the following independent situations on December 31, 2021.

1. Its line of amplifiers carries a 3-year warranty against defects. On the basis of past experience the estimated warranty costs related to dollar sales are first year after sale—2% of sales revenue; second year after sale—3% of sales revenue; and third year after sale—5% of sales revenue. Sales and actual warranty expenditures for the first 3 years of business were:

Sales Warranty        Revenue Expenditures

2019      $ 800,000                 $ 6,500

2020       1,100,000                 17,200

2021      1,200,000                 62,000

Instructions:  Compute the amount that Schmitt should report as a liability in its December 31, 2021, balance sheet. Assume that all sales are made evenly throughout each year with warranty expenses also evenly spaced relative to the rates above.

2.  With some of its products, Schmitt includes coupons that are redeemable in merchandise. The coupons have no expiration date and, in the company’s experience, 40% of them are redeemed. The liability for unredeemed coupons at December 31, 2020, was $9,000. During 2021, coupons worth $30,000 were issued, and merchandise worth $8,000 was distributed in exchange for coupons redeemed.

Instructions

Compute the amount of the liability that should appear on the December 31, 2021, balance sheet.