Larkspur Music Emporium carries a wide variety of musical instruments, sound rep
ID: 2439872 • Letter: L
Question
Larkspur Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. Larkspur 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. Larkspur pays $21 for each player and estimates that 50% of the coupons given to customers will be redeemed.
Larkspur’s total sales for 2017 were $6,544,000—$5,144,000 from musical instruments and sound reproduction equipment and $1,400,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled $170,600 during 2017. A total of 6,730 players used in the premium program were purchased during the year and there were 1,162,000 coupons redeemed in 2017.
The balances in the accounts related to warranties and premiums on January 1, 2017, were as shown below.
Larkspur 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.)
Explanation / Answer
Working:
a. (2% x $5144000) = $102880
b. ($1400000/200 x 50% x $21) - ($1400000/200 x 50% x $10) = $73500 - $35000 = $38500
c. ($1162000/200 x $21) = $122010
d. ($1162000/200 x $21) - ($1162000/200 x $10) = $122010 - $58100 = $63910
(a) Warranty expense $ 1,02,880 (b) Warranty liability $ 64,980 (c) Premium expense $ 38,500 (d) Inventory of premiums $ 59,260 (e) Premium liability $ 16,050Related Questions
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