Garison Music Emporium carries a wide variety of musical instruments, sound repr

Question

Garison Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. Garison 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 300 coupons and $20 for a digital MP3 player. Garison pays $31 for each player and estimates that 50% of the coupons given to customers will be redeemed.

Garison’s total sales for 2014 were $7,426,000—$5,824,000 from musical instruments and sound reproduction equipment and $1,602,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled $170,100 during 2014. A total of 7,130 players used in the premium program were purchased during the year, and there were 1,370,000 coupons redeemed in 2014.

The accrual method is used by Garison to account for the warranty and premium costs for financial reporting purposes. The balances in the accounts related to warranties and premiums on January 1, 2014, were as shown below.

Garison Music Emporium is preparing its financial statements for the year ended December 31, 2014. Determine the amounts that will be shown on the 2014 financial statements for the following.(Round answers to 0 decimal places, e.g. 125.)

Explanation / Answer

5824000 2% 116480 Warranty Liability opening current Used during year closing 1602000 5340 Inventory of Premiums $ 38,360 $ 221,030.00 $          141,666.77 $ 117,723.23 50% 2670 11 29370 Premium Liability Premium Liability $ 44,840 $ 29,370 $            50,233.33 $ 23,976.67 Warranty Liability $ 144,600 $ 116,480 $ 170,100 $ 90,980 1370000 4566.667 11 50233.33333 used coupons Warranty Expenses $ 170,100 7130 31 221030 Inventory of premiums Warranty Liability $ 90,980 4566.67 31 141566.77 Used items Premium Expenses $ 50,233 Inventory of premiums $ 117,723 premium Liability $ 23,977

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