Flounder Company must make computations and adjusting entrie

Flounder Company must make computations and adjusting entries for the following independent situations at December 31, 2018.

1. Its line of amplifiers carries a 3-year warranty against defects. On the basis of past experience the estimated warranty costs related to dollar sales are first year after sale—2% of sales revenue; second year after sale—3% of sales revenue; and third year after sale—5% of sales revenue. Sales and actual warranty expenditures for the first 3 years of business were:

Sales
Revenue

Warranty
Expenditures

Compute the amount that Flounder should report as a liability in its December 31, 2018, balance sheet. Assume that all sales are made evenly throughout each year with warranty expenses also evenly spaced relative to the rates above.

2. With some of its products, Flounder includes coupons that are redeemable in merchandise. The coupons have no expiration date and, in the company’s experience, 30% of them are redeemed. The liability for unredeemed coupons at December 31, 2017, was $9,400. During 2018, coupons worth $22,290 were issued, and merchandise worth $8,200 was distributed in exchange for coupons redeemed.

Compute the amount of the liability that should appear on the December 31, 2018, balance sheet.

Solution

1. Estimated warranty costs:

On 2016 sales $ 850,900 * 10%             $ 85,090

On 2017 sales $1,170,600 * 10%          $117,060

On 2018 sales $1,162,500 * 10%         $116,250

Total estimated warranty costs                $318,400

Total actual warranty expenditures:          $ 81,790*

*2016—$6,860; 2017—$15,530, and 2018—$59,400.

Balance of liability, 12/31/18                 $236,610

The liability account has a balance of $236,610 on 12/31/18 based on the difference between the estimated warranty costs (totaling $318,400) for the three years’ sales and the actual warranty expenditures (totaling $81,790) during that same period.

2.

Computation of liability for coupon claims outstanding:

Unredeemed coupons as of 12/31/2017 $9,400

Additional coupon liability generated by 2018 sale

($22,290 X 30%)                                                                 $6,687

Coupon redeemed in 2018                                               ($8,200)

Total coupon liability as of 12/31/2018                              $7,887