This Assignment Is A Continuation Of The Cookie Creations ✓ Solved

This assignment is a continuation of the Cookie Creations

This assignment is a continuation of the Cookie Creations case study and focuses on Cookie Creations' liabilities (current and long-term). From the information gathered from the unit lesson, required unit resources, and suggested unit resources, read the Cookie Creations case study below. The case study allows you to apply what you have learned about liabilities and the accounting process.

Part I: Warranty Liability Calculation

Recall that Cookie Creations sells fine European mixers that it purchases from Kzinski Supply Company. Kzinski warrants the mixers to be free of defects in material and workmanship for 1 year from the date of original purchase. If the mixer has such a defect, Kzinski will repair or replace the mixer free of charge for parts and labor. The product must be shipped prepaid to an authorized Kzinski service center, with the consumer paying the cost to ship the mixer, while Kzinski covers the cost to return the product to the consumer.

Based on past experience, Kzinski has found that approximately 10% of mixers are returned for repair or replacement. The average cost to ship a mixer to Boston is $60. In 2020, a total of 30 mixers are sold, with four returned for repair in 2021, incurring a total shipping cost of $210. In 2021, Cookie Creations sold 40 mixers, and two were returned for repair at a shipping cost of $55.

For Part I of the assignment, you need to calculate the warranty liability for the shipping costs at December 31, 2020, including the estimated warranty liability and prepare summary journal entries for the shipment of the mixers used for warranty repairs in 2021. Also, calculate the warranty liability at December 31, 2021.

Part II: Note Payable for Oven Purchase

Natalie and Curtis have been experiencing great demand for their cookies and muffins, leading them to consider purchasing a commercial oven costing $17,000. They have $5,000 set aside and need to borrow the remaining $12,000. A bank manager agreed to lend them the amount at a 5% interest rate for three years, with fixed principal payments of $2,000 every May 1 and November 1, plus interest.

For Part II of the assignment, prepare a payment schedule for the life of the note, journal entries for the purchase of the oven and the note payable on November 1, 2020, and the journal entries on May 1 and November 1 for the note. Determine the current and long-term portions of the note payable at October 31, 2021.

Paper For Above Instructions

The Cookie Creations case study presents real-world implications of accounting principles, specifically in estimating liabilities associated with warranties and managing long-term debt. Understanding these principles is essential for accurately reflecting a company’s financial health.

Part I: Warranty Liability Calculation

The warranty liabilities represent an obligation for future shipping costs incurred due to warranty claims. As per Kzinski Supply Company's warranty, Cookie Creations is expected to handle the logistics of returning mixers for repairs free of charge to customers. Using the historical return rate of 10% for warranty claims, the expected warranty claims need to be documented in the financial statements.

Calculating Warranty Liability for 2020

For the year 2020, Cookie Creations sold 30 mixers. Based on the 10% return rate, the estimated number of mixers expected to be returned is 3 (10% of 30). The average shipping cost for each mixer is $60, so the total estimated warranty liability as of December 31, 2020, is calculated as follows:

Estimated Warranty Liability = Estimated Returns × Shipping Cost per Mixer = 3 × $60 = $180

At year-end December 31, 2020, Cooke Creations must recognize a warranty liability of $180 in their financial statements.

Journal Entries for Warranty Repair Shipments

The total shipment costs in 2021 for the mixers from 2020 and 2021 amounted to $265 ($210 for four 2020 mixers and $55 for two 2021 mixers). The entries to record the warranty costs would involve debiting warranty expense and crediting cash or accounts payable for the total shipping cost of $265.

Calculating Warranty Liability for 2021

For December 31, 2021, Cookie Creations is only liable for services related to the 40 mixers sold in that year. Based on a 10% expected return rate, the anticipated number of returns is 4 (10% of 40), leading to a warranty liability of:

Estimated Warranty Liability = Estimated Returns × Shipping Cost per Mixer = 4 × $60 = $240

Part II: Note Payable for Commercial Oven

For the purchase of the commercial oven, Julie and Curtis decided to borrow $12,000 at an interest rate of 5% for a period of three years. The payment schedule will involve biannual principal payments along with interest calculated on the remaining balance. The payment plan, with principal reductions and interest payments documented in journal entries, outlines vital cash flow implications for future years.

Journal Entry for Purchase and Note Issuance

The initial outfit of the record would be to recognize the purchase of the oven:

Debit Equipment $17,000

Credit Cash $5,000

Credit Notes Payable $12,000

Journal Entries for Payments

Each May 1 and November 1, Journal entries would reflect the principal payment and interest liability due, detailing out the interest component based on the outstanding principal balance.

Determining Current and Long-term Portions of Note Payable

As of October 31, 2021, the current portion of the note payable reflects the next payment due within one year, while the long-term portion is the remaining balance beyond the current period. Recording would distinguish these amounts for accurate financial reporting.

Conclusion

This case study provides a practical application of liability recognition that is crucial for any business. The steps involving warranty liabilities and financing obligations need to be meticulously documented for legal and practical accountability.

References

• Financial Accounting Standards Board (FASB). (2023). Accounting Standards Codification.
• Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2021). Financial Accounting. Pearson.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Financial Accounting. Wiley.
• International Accounting Standards Board (IASB). (2023). International Financial Reporting Standards.
• Needles, B. E., & Powers, M. (2020). Financial Accounting. Cengage Learning.
• Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2021). Accounting. Wiley.
• Stickney, C. P., Brown, P., & Wahlen, J. (2020). Financial Reporting, Financial Statement Analysis, and Valuation. Cengage Learning.
• Schroeder, R. G., Clark, M. W., & Cathey, J. (2021). Financial Accounting Theory and Analysis: Text and Cases. Wiley.
• Wild, J. J., & Subramanyam, K. R. (2020). Financial Statement Analysis. McGraw-Hill Education.
• U.S. Securities and Exchange Commission (SEC). (2023). Financial Reporting Manual.