Problem - 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 digital MP3 player. Garison pays $34 for each player and estimates that 50% of the coupons given to customers will be redeemed.
Garisons total sales for 2014 were $7,496,000 $5,752,000 from musical instruments and sound reproduction equipment and $1,744,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled $169,400 during 2014. A total of 6,690 players used in the premium program were purchased during the year, and there were 1,346,000 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.
Inventory of Premiums $ 38,360
Premium Liability 45,220
Warranty Liability 139,800
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.
(a) Warranty Expense
(b) Warranty Liability
(c) Premium Expense
(d) Inventory of Premiums
(e) Premium Liability