# E 13-14 - Total estimated costs-\$310,000 Total warranty...

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"Schmitt Company must make computations and adjusting entries for the following independent situations at December 31, 2011. 1) It's line of amplifiers carries a 3-year warranty against defects. On the basis experience the estimated warranty costs related to dollar sales are: first year after sale - 2% of sales: second year after sale after sales - 3% of sales; and third year after sale-5% of sales. Sales and actual warranty expenditures for the first 3 years of business were: Sales Warranty Expenditures 2009 800,000 6,500 2010 1,100,000 17,200 2011 1,200,000 62,000 Instructions 1) Compute the amount that Schmitt Company should report as a liability in its December 31,2011, balance sheet. Assume that all sales are made evenly throughout each year with warranty expenses also evenly spaced relative to the rates above. Solution: Estimated warranty costs On 2009, Sales (\$800,000*0.10) ---------------\$80,000 On 2010, Sales (1,100,000*0.10) ------------\$1, 10,000 On 2011, Sales (1,200,000*0.10) ------------\$1, 20,000

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Unformatted text preview: Total estimated costs-----------------------------\$310,000 Total warranty expenditures-----------------------85,700 (6,500 + 17,200 + 62,000) Balance of liability, 12/31/11-------------------\$224,300 (310,000 85,700) 2) With some of the products, Schmitt 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, 2010, was 9,000. During 2011, coupons worth 30,000 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, 2011, balance sheet. Solution: Unredeemed coupons for 2011---------------------\$1000 (\$9000 - \$8000) 2011 coupons estimated to be redeemed---------\$12,000 (\$30,000*0.40) Amount of liability---------------------------------\$13,000...
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## This note was uploaded on 10/03/2011 for the course ACCOUNTING 103 taught by Professor Ngo during the Spring '11 term at Berkeley.

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E 13-14 - Total estimated costs-\$310,000 Total warranty...

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