Question

Splish Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. Splish uses two sales promotion techniques—warranties and premiums—to attract customers.

Musical instruments and sound equipment are sold with a 1-year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 1% 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 an MP3 player. Splish pays $33 for each player and estimates that 70% of the coupons given to customers will be redeemed.

Splish’s total sales for 2020 were $6,772,000—$5,188,000 from musical instruments and sound reproduction equipment and $1,584,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled $85,000 during 2020 ($40,000 of the work is related to pre-2020 sales). A total of 6,000 players used in the premium program were purchased during the year and there were 1,124,000 coupons redeemed in 2020.

The balances in the accounts related to warranties and premiums on January 1, 2020, were as shown below.

Premium Inventory		$ 34,290
Premium Liability		42,170
Warranty Liability		50,500

Splish Music Emporium is preparing its financial statements for the year ended December 31, 2020. Determine the amounts that will be shown on the 2020 financial statements for the following.

(a)		Warranty Expense		$
(b)		Warranty Liability		$
(c)		Premium Expense		$
(d)		Premium Inventory		$
(e)		Premium Liability		$

Answer 1

Solution:

a)

Warranty expense:

Sales of musical instruments and sound equipment = $5,188,000

Warranty expense = $5,188,000 *1%

=$51,880

b)

Warranty laibility:

Opening balance	$50,500
Add: Warranty expenses	$51,880
Less: Actual warranty cost	($85,000)
Warranty laibility	$17,380

c)

Estimated number of coupons to be redeemed (1,584,000*70%)	1,108,000
Estimated number of premium players to be issued(1,108,000 /200)	5,540
Net cost of playersNet cost of players ($33 -$20)	$13
Premium expense (5,540 *$13)	$72,020

d)

Opening balance	$34,290
Add: Premium players purchase (6,000 *$33)	$198,000
Less: Exchange for coupons (1,124,000 /200)*33	($185,460)
Premium inventory	$46,830

e)

Estimated liability	$42,170
Premium expense	$72,020
Actual redemption (1,124,000 /200)*$13	($73,060)
Premium laibility	$41,130

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