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 200 coupons and $ 20 for a CD player. Garison pays $ 32 for each CD player and estimates that 60% of the coupons given to customers will be redeemed.
Garison's total sales for 2012 were $ 7,200,000-$ 5,700,000 from musical instruments and sound reproduction equipment and $ 1,500,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled $ 164,000 during 2012. A total of 6,500 CD players used in the premium program were purchased during the year and there were 1,200,000 coupons redeemed in 2012.
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, 2012, were as shown below.
- Inventory of Premium CD Players $ 37,600
- Premium Liability 44,800
- Warranty Liability 136,000
Instructions: Garison Music Emporium is preparing its financial statements for the year ended December 31, 2012. Determine the amounts that will be shown on the 2012 financial statements for the following.
(1) Warranty Expense -
(2) Warranty Liability -
(3) Premium Expense -
(4) Inventory of Premiums -
(5) Premium Liability -