(Warranty, Bonus, and Coupon Computation) Victor Hugo Company must make computations and adjusting entries for the following independent situations at December 31, 2004.

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; second year after sale—3% of sales; and third year after sale—4% of sales. Sales and actual warranty expenditures for the first 3 years of business were:

Instructions Compute the amount that Hugo Company should report as a liability in its December 31, 2004, balance sheet. Assume that all sales are made evenly throughout each year with warranty expenses also evenly spaced relative to the rates above.
*2. Hugo Company’s profit-sharing plan provides that the company will contribute to a fund an amount equal to one-fourth of its net income each year. Income before deducting the profit-sharing contribution and taxes for 2004 is $1,035,000. The applicable income tax rate is 40%, and the profitsharing contribution is deductible for tax purposes.
Instructions Compute the amount to be contributed to the profit-sharing fund for 2004.
3. With some of its products, Hugo Company includes coupons that are redeemable in merchandise. The coupons have no expiration date and, in the company’s experience, 40% of them are redeemed. The liability for unredeemed coupons at December 31, 2003, was $9,000. During 2004, coupons worth $25,000 were issued, and merchandise worth $8,000 was distributed in exchange for coupons redeemed.
Instructions Compute the amount of the liability that should appear on the December 31, 2004, balance sheet.

Transcribed Image Text:

Sales 2002 2003 $ 800,000 2004 1,100,000 1,200,000 Warranty Expenditures $ 6,500 17,200 62,000