Professional Documents
Culture Documents
Receivables, While The Related Loan Will Be Reported Under Current Liabilities
Receivables, While The Related Loan Will Be Reported Under Current Liabilities
Dolores’ Music Emporium carries a wide variety of music promotion techniques – warranties and premiums
– to attract customers.
Musical instrument and sound equipment are sold in 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 peso spent
on recorded music or sheet music. Customers may exchange 200 coupons and P20 for an AM/FM radio.
Dolores pays P34 for each radio and estimates that 60% of the coupons given to customers will be
redeemed.
Dolores’ total sales for 2010 were P57,600,000 – P43,200,000 from musical instrument and sound
reproduction equipment and P14,400,000 from recorded music and sheet music. Replacement parts and
labor for warranty work totaled P1,312,000 during 2010. A total of 52,000 AM/FM radio used in the
premium program were purchased during the year and there were 9,600,000 coupons redeemed in 2010.
The accrual method is used by Dolores to account for the warranty and premium costs for financial reporting
purposes. The balance in the accounts related to warranties and premiums on January 1, 2010, were as
shown below:
QUESTIONS:
Based on the above and the result of your audit, determine the amounts that will be shown on the 2010
financial statements for the following:
1. Warranty expense
a. P 864,000 c. P1,312,000
b. P1,152,000 d. P 640,000
3. Premium expense
a. P 604,800 c. P 864,000
b. P1,468,800 d. P 1,008,000
4. Inventory of AM/FM radio
a. P375,600 c. P 618,800
b. P319,600 d. P 455,600
5. Estimated liability for premiums
a. P604,800 c. P 507,600
b. 291,200 d. P 358,400
Answers: 1) A; 2) D; 3) A; 4) D; 5) B