SONY Music, Inc. manufactures and sells high-quality musical instruments. All instruments sold come with a warranty where SONY promises to fully refund a customer’s money if any instruments turn out to be unsatisfactory. During the first three months of 2022, SONY sold $10 million worth of instruments, and customers returned instruments worth $5,000 for a refund (which SONY has already paid). The cost of those instruments returned was $2,500. At the end of March 2022, SONY estimates based on past experience that customers will likely return an additional $10,000 of instruments sometime during the next few months. Required: 1. Using the accounting rules governing contingencies, analyze SONY'S situation and determine whether SONY would need to record a liability for its warranty program as of March 31, 2022. Clearly explain your answer by connecting with the steps in the contingency accounting rules. 2. Give the entry(ies) that SONY would make to record the instruments already returned. Also, if you determine in part (1) that a liability should be recorded for possible additional returns, give the entry(ies) you would make to record that liability.
SONY Music, Inc. manufactures and sells high-quality musical instruments. All instruments sold come with a warranty where SONY promises to fully refund a customer’s money if any instruments turn out to be unsatisfactory.
During the first three months of 2022, SONY sold $10 million worth of instruments, and customers returned instruments worth $5,000 for a refund (which SONY has already paid). The cost of those instruments returned was $2,500. At the end of March 2022, SONY estimates based on past experience that customers will likely return an additional $10,000 of instruments sometime during the next few months.
Required:
1. Using the accounting rules governing contingencies, analyze SONY'S situation and determine whether SONY would need to record a liability for its warranty program as of March 31, 2022. Clearly explain your answer by connecting with the steps in the contingency accounting rules.
2. Give the entry(ies) that SONY would make to record the instruments already returned. Also, if you determine in part (1) that a liability should be recorded for possible additional returns, give the entry(ies) you would make to record that liability.
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