Garison Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. Garison uses two sales promotion techniques—warranties and premiums—to attract customers. 

Musical instruments and sound equipment are sold with a 1-year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 1% 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 $20 for an MP3 player. Garison pays $32 for each player and estimates that 60% of the coupons given to customers will be redeemed.

Garison’s total sales for 2025 were $7,200,000—$5,700,000 from musical instruments and sound reproduction equipment and $1,500,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled $94,000 during 2025 ($44,000 of the work is related to pre-2025 sales). A total of 6,500 players used in the premium program were purchased during the year and there were 1,200,000 coupons redeemed in 2025.

The balances in the accounts related to warranties and premiums on January 1, 2025, were as shown below.

Instructions

Garison Music Emporium is preparing its financial statements for the year ended December 31, 2025. Determine the amounts that will be shown on the 2025 financial statements for the following.

a. Warranty Expense.

b. Warranty Liability.

c. Premium Expense.

d. Premium Inventory.

e. Premium Liability.

Transcribed Image Text:

Premium Inventory Premium Liability Warranty Liability $37,600 44,800 56,000