Cookie Creations (Chapters 11 and 15)
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, which is also available on p.11-37 (Chapter 11) and p. 15-38 (Chapter 15) in the textbook.
The case study allows you to apply what you have learned about liabilities and the accounting process. This assignment will allow you to practice what you have learned so far.
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. The consumer pays the cost to ship the mixer. The cost to return the product to the consumer is paid by Kzinski.
The authorized service center is located in Boston. Because Cookie Creations values serving its customers, it pays the shipping to Boston for any mixers needing repair under Kzinski’s warranty terms. 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.
The following transactions take place in 2020 and 2021.
- A total of 30 mixers are sold in 2020.
- Four of the mixers sold in 2020 are returned for repair in 2021. The total shipping cost for returning these four mixers to Boston is $210.
- A total of 40 mixers are sold in 2021.
- Two of the mixers sold in 2021 are returned for repair in 2021. The total shipping cost for returning these two mixers to Boston is $55.
For Part I of the assignment, complete the tasks listed below using Excel.
- Calculate Cookie Creations’ warranty liability for the shipping costs at December 31, 2020.
- Record the estimated warranty liability at December 31, 2020.
- Prepare the summary journal entry (or entries) to record the shipment of the six mixers (four from the 2020 sales and two from the 2021 sales) for warranty repair in 2021. d.
- Calculate Cookie Creations’ warranty liability at December 31, 2021. (Hint: Note that there is no liability outstanding for the mixers sold in 2020. The 1-year warranty period has expired.)
- Record the estimated warranty liability at December 31, 2021. (Hint: Similar to accounting for bad debts, consider any existing balance in the warranty liability account when you prepare your entry. You will find it helpful to prepare a general ledger account for the warranty liability and to post the above transactions.)
Natalie and Curtis have been experiencing great demand for their cookies and muffins. As a result, they are now thinking about buying a commercial oven. They know which oven they want and that it will cost $17,000. The company already has $5,000 set aside for the purchase and will need to borrow the rest.
Natalie and Curtis met with a bank manager to discuss their options. She is willing to lend Cookie & Coffee Creations Inc. $12,000 on November 1, 2020, for 3 years at a 5% interest rate. The terms provide for fixed principal payments of $2,000 on May 1 and November 1 of each year plus 6 months of interest.
For Part II of the assignment, complete the tasks listed below.
- Prepare a payment schedule for the life of the note.
- Prepare the journal entry for the purchase of the oven and the issue of the note payable on November 1, 2020.
- Prepare the journal entries on May 1 and November 1 for the note.
- Determine the current portion of the note payable and the long-term portion of the note payable at October 31, 2021.