Week 2 Output-King
Week 2 Output-King
bar wrappers presented by customers together with P100.00. The purchase price of
each mug to the company is P90.00; in addition it costs P60.00 to mail each mug. The
results of the premium plan for the years 2019 and 2020 are as follows (assume all
purchases and sales are for cash):
2019 2020
Coffee mugs purchased 72,000 80,000
Candy bars sold 560,000 675,000
Wrappers redeemed 280,000 420,000
2019 wrappers expected to 200,000
be redeemed in 2020
2020 wrappers expected to 270,000
be redeemed in 2021
Instructions
(a) Prepare the general journal entries that should be made in 2019 and 2020 related
to the above plan by Tangy Candy.
(b) Indicate the account names, amounts, and classifications of the items related to the
premium plan that would appear on the Tangy Candy Company balance sheet and
income statement at the end of 2019 and 2020.
Solution:
(a.)2014
Premium Inventory P 6,480,000
Cash (72,000*90) P6,480,000
Cash 28,000,000
Sales Revenue (560,000*50) 28,000,000
2015
Premium Inventory P 7,200,000
Cash (80,000*90) P7,200,000
Cash 33,750,000
Sales Revenue (675,000*50) 33,750,000
INCOME STATEMENT
Name Classifications 2019 2020
Premium Expense Operating Expense 2,400,000 2,450,000
James Equipment Company sells computers for 150,000 each and also gives each
customer a 2-year warranty that requires the company to perform periodic services and
to replace defective parts. During 2019, the company sold 70 computers. Based on past
experience, the company has estimated the total 2-year warranty costs as P3000 for
parts and P6000 for labor. (Assume sales all occur at December 31, 2019.)
In 2020, James incurred actual warranty costs relative to 2019 computer sales of
1,000,000 for parts and 1,800,000 for labor.
Instructions
1. Under the accrual method, give the entries to reflect the above transactions for
2019 and 2020.
2. Under the cash method, give the entries to reflect the above transactions for
2019 and 2020.
3. Analyze and present the difference in incurrence of expense between the two
methods. (i.e., Warranty expense and Warranty liability balances)
4. Which method is more appropriate? Explain.
ACCRUAL METHOD
Dr. Cr.
2019
Cash P10,500,000
Sales P10,500,000
2020
Estimated Warranty Liability 2,800,000
Inventory-parts 1,000,000
Accrued Payroll 2,800,000
1. CASH METHOD
Dr. Cr.
2019
Cash P10,500,000
Sales P10,500,000
2020
Warranty Expense 2,800,000
Inventory-parts 1,000,000
Accrued Payroll 2,800,000
2.
Accrual Method Cash Method
Warranty Expense
2019 P630,000
2020 P2,800,000
Estimated Warranty Liability
2019 630,000
2020 2,800,000 2,800,000