Ray Charles Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. Charles uses two sales promotion techniques- warranties and premiums- to attract customers.
Musical instruments and sound equipment are sold with 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 recoded 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. Estefan's pays $34 for each CD player and estimates that 60% of the coupons given to customers will be redeemed.
Charles total sales for 2007 were $7,200,000-$5,400,000 from musical instruments and sound reproduction equipment and $1,800,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled $164,000 during 2007. 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 2007.
The accrual method is used by Charles 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, 2007, were shown below.
Inventory of Premium CD players
Estimated premium Claims Outstanding
Estimated Liability from Warranties
Ray Charles Music Emporium is preparing its financial statements for the year ended December 31, 2007. Determine the amounts that will be shown on the 2007 financial statements for the following.
1. Warranty Expense
2. Estimated Liability from Warranties
3. Premium Expense
4. Inventory of Premium CD players
5. Estimated Premium Claims Outstanding
The solution examines warranties and premiums amounts. The premium claims are estimated.