Problem 4-4 Audit of warranty and premium payable Taylor’s Version Co. 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 a red scarf.
Taylor’s Version pays P34 for each scarf and estimates that 60% of the coupons given to customers will be redeemed. Taylor’s Version’ total sales for 2020 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 P1,312,500 during 2020. A total of 52,000 red scarf used in the premium program were purchased during the year and there were 9,600,000 coupons redeemed in 2020.
The accrual method is used by Taylor’s Version 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, 2006, were as shown below:
Inventory of red scarf giveaway P 319,600
Estimated Premium Claims Outstanding 358,400
Estimated Liability from Warranties 1,088,000
Based on the above and the result of your audit, determine the amounts that will be shown on the 2020 financial statements for the following:
1. Warranty expense
2. Estimated liability from warranties
3. Premium expense
4. Inventory of red scarf giveaway
5. Estimated liability for premiums