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  • Week 2 Output-King

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    Alexis King
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    The accrual method is more appropriate because it matches expenses with the period in which they are incurred rather than when cash is paid out. Under the accrual method, warranty expenses are recognized in 2019 for the estimated costs associated with 2019 computer sales, even though the actual cash payments for those expenses may not occur until 2020. This results in a more accurate matching of revenues and expenses between periods. The cash method does not recognize any warranty expense in 2019, deferring all costs associated with 2019 sales until 2020 when cash is paid out. This misstates expenses for 2019 and does not follow the matching principle.

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    The accrual method is more appropriate because it matches expenses with the period in which they are incurred rather than when cash is paid out. Under the accrual method, warranty expenses are recognized in 2019 for the estimated costs associated with 2019 computer sales, even though the actual cash payments for those expenses may not occur until 2020. This results in a more accurate matching of revenues and expenses between periods. The cash method does not recognize any warranty expense in 2019, deferring all costs associated with 2019 sales until 2020 when cash is paid out. This misstates expenses for 2019 and does not follow the matching principle.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    2K views4 pages

    Week 2 Output-King

    Uploaded by

    Alexis King
    The accrual method is more appropriate because it matches expenses with the period in which they are incurred rather than when cash is paid out. Under the accrual method, warranty expenses are recognized in 2019 for the estimated costs associated with 2019 computer sales, even though the actual cash payments for those expenses may not occur until 2020. This results in a more accurate matching of revenues and expenses between periods. The cash method does not recognize any warranty expense in 2019, deferring all costs associated with 2019 sales until 2020 when cash is paid out. This misstates expenses for 2019 and does not follow the matching principle.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    Download as docx, pdf, or txt
    of 4

    Tangy Candy Company offers a coffee mug as a premium for every ten 50-peso candy

    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

    Cash (280,000/10*100-60) 1,120,000


    Premium Expense 1,400,000
    Premium Inventory 2,520,000
    (28,000*90)
    Premium Expense 1,000,000
    Premium Liability 1,000,000
    (200,000/10*50)

    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

    Cash (420,000/10*100-60) 1,680,000


    Premium Liability 1,000,000
    Premium Expense 1,100,000
    Premium Inventory 3,780,000
    (42,000*90)

    Premium Expense 1,350,000


    Premium Liability 1,350,000
    (270,000/10*50)

    (b.) BALANCE SHEET


    Name Classifications 2019 2020
    Premium Inventory Current Asset 3,960,000 3,420,000

    Premium Liability Current Liability 1,000,000 (350,000)

    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

    Warranty Expense 630,000


    Estimated Warranty Liability 630,000

    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

    3. Accrual method, because the cost matches with revenue

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