Reference no: EM132642257
Question - You have just been asked by your employer, MusicTech, Inc., [MTI] to review the work of one of its work study interns, Z. Kount. Z. Kount has completed assignments on several issues and you are excited to review each assignment, one at a time. "Bring it on," you say and he does!
You are required to review the end results for the computation accuracy, correct application of the relevant standards, good format and appropriate presentation style which provides sufficient explanations and footnotes to the readers. Assume that the IFRS standards are being followed unless stated differently. The year end is December 31. Now you turn to review Z. Kount's work on warranty transactions!
The company manufactures high end pianos which are used by professional musicians at musical concerts, etc. Since the company had no in house facilities to offer after sales services, it sub-contracted the job to a professional piano maintenance firm iTuneIt who bills MTI for services as they are rendered. You are told that the pianos were first introduced in the market in 2017. Kount hands you over the following journal entries related to MTI's warranty program for 2017.
During The Year, 2017
1. Cash 30,000,000
Piano Revenues 30,000,000
[Sold 2,000 Pianos]
2. Warranty expense 445,500
Cash 445,500
[Paid iTuneIt For Actual Warranty Repair Services]
December 31, 2017
No Additional Adjusting Entries Required For Warranty Transactions For 2017
Firstly, he informs you that he was familiar only with the assurance typed approach to accounting for warranty costs. Further, according to him, the method advocated by the IFRS was nothing more than an obvious attempt to make accounting more complicated for everyone else. He then proceeds to inform you that all bills received from iTuneIt during 2017 had been paid and hence he saw no need to make any further entries for warranties on December 31, 2017. He then exclaims "we make very fine pianos and in 2017 really spent only 18% of the total budgeted /expected costs for warranty repairs. I expect the balance to be spent next year. Also the costing department had informed me that of the total Piano Revenues, 16% could be allocated to revenues from warranty services. But frankly, I ignored this information. There was no point in billing the customers for the revenues nor recording them separately, since these were already bundled into the sales price."
From your independent review of other documents, you determined that the warranty revenues, allocated as mentioned above, should be recognized based on the proportion of costs incurred out of the total budgeted warranty costs. The company sold 3,600 pianos in 2018. Assume the same, per unit, revenue and cost structures for 2018 as in 2017.
Using the assurance type method, answer Questions [i] and [ii] stated below.
i] Prepare the adjusting journal entry/entries required (taking into consideration the entry already made by Mr. Z. Kount), to be made on December 31, 2017, in proper format, to record the estimated warranty costs for 2017.
ii] Determine the amount of the estimated warranty liability to be reported on the Balance Sheet as at December 31, 2017. How will this liability be classified?
Now using the service type warranty method, answer the rest of the questions stated below.
iii] Prepare the journal entry/entries for 2017 to record the sale of pianos.
iv] Prepare the adjusting journal entry/entries on December 31, 2017 in proper format, to record the warranty revenues in 2017.
v] Determine the amount of the estimated warranty liability to be reported on the Balance Sheet as at December 31, 2017. How will this liability be classified?
vi] Prepare the journal entry/entries, in proper format, to record the warranty expenses incurred in 2018.
vii] Determine the amount to be recorded as Warranty Revenues in 2018. NO JOURNAL ENTRY IS REQUIRED.