Swifty Music Emporium carries a wide variety of musical inst

Swifty Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. Swifty 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 $10 for an MP3 player. Swifty pays $21 for each player and estimates that 50% of the coupons given to customers will be redeemed.

Swifty’s total sales for 2017 were $6,544,000—$5,144,000 from musical instruments and sound reproduction equipment and $1,400,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled $170,600 during 2017. A total of 6,730 players used in the premium program were purchased during the year and there were 1,162,000 coupons redeemed in 2017.
The balances in the accounts related to warranties and premiums on January 1, 2017, were as shown below.

Swifty Music Emporium is preparing its financial statements for the year ended December 31, 2017. Determine the amounts that will be shown on the 2017 financial statements for the following

Inventory of Premiums		$ 39,940
Premium Liability		41,460
Warranty Liability		132,700

Solution

Warranty expense = 2% of sale of instrument and equipment = 2%*5144000 = 102880 Warranty liability = balance + warranty expense – payments = 132700+102880-170600 = 64980 Premium expense = ((1400000 coupons*50% redemption rate)/200 coupons per MP3)*(net cost, 21-10) =((1400000*50%)/200)*11 =38500 Inventory of premium = balance + premium purchases –premium issued = 39940+(6730*21)-(1162000/200*21) = 59260 Premium liability = balance + premium expense – premium issued = 41460+38500- (1162000/200*10) = 21860