Question Details

Merritt Equipment Company sells computers 



1
Kane Candy Company offers a coffee mug as a premium for every ten $1 candy bar wrappers presented by customers together with $2.  The purchase price of each mug to the company is $1.80; in addition it costs $1.20 to mail each mug. The results of the premium plan for the years 2014 and 2015 are as follows (assume all purchases and sales are for cash):
	    2014		    2015	
Coffee mugs purchased	720,000	800,000
Candy bars sold	5,600,000	6,750,000
Wrappers redeemed	2,800,000	4,200,000
2014 wrappers expected to be redeemed in 2015	2,000,000
2015 wrappers expected to be redeemed in 2016		2,700,000

Instructions
(a)	Prepare the general journal entries that should be made in 2014 and 2015 related to the above plan by Kane Candy.
(b)	Indicate the account names, amounts, and classifications of the items related to the premium plan that would appear on the Kane Candy Company balance sheet and income statement at the end of 2014 and 2015.


2
Merritt Equipment Company sells computers for $1,500 each and also gives each customer a 2-year warranty that requires the company to perform periodic services and to replace defective parts. During 2014, the company sold 900 computers. Based on past experience, the company has estimated the total 2-year warranty costs as $40 for parts and $60 for labor. (Assume sales all occur at December 31, 2014.)

In 2015, Merritt incurred actual warranty costs relative to 2014 computer sales of $12,000 for parts and $18,000 for labor.

Instructions
(a)	Under the expense warranty approach, give the entries to reflect the above transactions (accrual method) for 2014 and 2015.
(b)	Under the cash-basis method, what are the Warranty Expense balances for 2014 and 2015?
(c)	The transactions of part (a) create what balance under current liabilities in the 2014 




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