To
stimulate the sales of its Sugar Kids breakfast cereal, Kwiecien Corporation
places one coupon in each cereal box. Five coupons are redeemable for a premium
consisting of a child's hand puppet. In 2011, the company purchases 40,000
puppets at $1.50 each and sells 480,000 boxes of Sugar Kids at $3.75 a box.
From its experience with other similar premium offers, the company estimates
that 40% of the coupons issued will be mailed back for redemption. During 2011,
115,000 coupons are presented for redemption.
Instructions
(a)
Prepare the journal entries that should be recorded in 2011 relative to the
premium plan, assuming that the company follows a policy of charging the cost
of coupons to expense as they are redeemed and adjusting the liability account
at year end.
(b)
Prepare the journal entries that should be recorded in 2011 relative to the
premium plan, assuming that the company follows a policy of charging the full
estimated cost of the premium plan to expense when the sales are recognized.
(c)
How would the accounts resulting from the entries in (a) and (b) above be
presented on the 2011 financial statements?
(a)
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Inventory of Premium Puppets....................................................
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60,000
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Cash.....................................................................................
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60,000
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(To record purchase of 40,000
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puppets at $1.50 each)
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Cash ...............................................................................................
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1,800,000
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Sales.....................................................................................
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1,800,000
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(To record sales of 480,000 boxes
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at $3.75 each)
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Premium Expense..........................................................................
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34,500
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Inventory
of Premium Puppets........................................
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34,500
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[To record redemption of 115,000
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coupons. Calculation:
(115,000 ¸ 5) X $1.50 = $34,500]
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Premium Expense..........................................................................
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23,100
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Estimated
Liability for Premiums.....................................
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23,100
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[To record estimated liability for
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premium claims outstanding at
December
31, 2011.]
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Calculation: Total coupons issued in 2011
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480,000
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Total estimated redemptions (40%)
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192,000
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Coupons redeemed in 2011
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115,000
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Estimated future redemptions
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77,000
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Cost of
estimated claims outstanding
(77,000 ¸ 5) X $1.50 = $23,100
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||
(b)
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Inventory of Premium Puppets....................................................
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60,000
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|
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Cash.....................................................................................
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60,000
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(To record purchase of 40,000
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puppets at $1.50 each)
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Cash ...............................................................................................
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1,800,000
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Sales.....................................................................................
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1,800,000
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(To record sales of 480,000 boxes
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at $3.75 each)
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Premium Expense..........................................................................
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57,600
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Estimated
Liability for Premiums.....................................
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57,600
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[To record premium expense for
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the full estimated cost of the
premium plan]
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Calculation:
Total coupons issued in 2011
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480,000
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Redemption rate
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X 40%
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Total estimated redemptions (40%)
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192,000
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Number of coupons per premium
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¸ 5
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Number of premium claims
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38,400
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Cost of premium
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X $1.50
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Total premium expense for the year
2011
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$57,600
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Estimated Liability for Premiums.................................................
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34,500
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Inventory
of Premium Puppets........................................
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34,500
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[To record redemption of 115,000
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coupons. Calculation:
(115,000 ¸ 5) X $1.50 = $34,500]
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(c) The financial statement presentation would
be the same for both approaches used in parts (a) and (b).
Balance
Sheet:
Current
Assets:
Inventory of
premiums ($60,000 – $34,500) $25,500
Current Liabilities:
Estimated
Liability for Premiums ($57,600 – $34,500) $23,100
Income Statement:
Sales $1,800,000
Less: Premium
Expense 57,600
