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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Premium Obligation Yummy Cereal Company is offering one toy shovel set for 15 box tops of its cereal. Year-to-date sales have been off, and it is hoped that this offer will stimulate demand. Each shovel set costs the company $3. The following data are available for the last 3 months of 2019:

Chapter 9, Problem 16P, Premium Obligation Yummy Cereal Company is offering one toy shovel set for 15 box tops of its

It is estimated that only 70% of the box tops will be redeemed. The cereal sells for $2.80 per box.

Required:

  1. 1. Prepare journal entries for each month to record sales, shovel set purchases, and redemptions.
  2. 2. Assuming Yummy prepares monthly financial statements, indicate how the inventory of premiums and the estimated liability would be disclosed on Yummy’s ending balance sheets for October, November, and December.

1.

To determine

Prepare the journal entry to record the sales, shovel set purchases and redemption for each month in the books of Company YC.

Explanation

Prepare the journal entry to record the sales made during October:

DateAccount Titles and ExplanationsDebit ($)Credit ($)
OctoberCash or Accounts receivable (21,000×$2.80)58,800 
 Sales 58,800
 (To record the sale of 21,000 cereal boxes)  

Table (1)

Prepare the journal entry to record the purchase of shovel set:

DateAccount Titles and ExplanationsDebit ($)Credit ($)
OctoberInventory of premiums (880×$3.00)2,640 
     Cash 2,640
 (To record the purchase of toy shovel sets)  

Table (2)

Prepare the journal entry to record the estimated total premium liability:

DateAccount Titles and ExplanationsDebit ($)Credit ($)
OctoberPremium expenses (2)2,940 
 Estimated premium liability 2,940
 (To record the recognition of estimated premium liability)  

Table (3)

Working note (1):

Calculate the total box tops estimated for redemption:

ParticularsAmount ($)Amount ($)
Total box tops outstanding in October 2019 (A)21,000 
Estimated percent redeemed (B)70% 
Total box tops estimated for redemption (C) (A×B) 14,700

Table (4)

Working note (2):

Calculate the amount of premium expenses:

Premium expense = [Total box tops estimated for redemptionOffer of a toy shovel set upon return of 15 top boxes×Cost of a shovel set]=14,70015×($3.00)=$2,940

Prepare the journal entry to record the redemption of 12,000 top boxes in October:

DateAccount Titles and ExplanationsDebit ($)Credit ($)
OctoberEstimated premium liability (3)2,400 
     Inventory of premiums 2,400
 (To record the redemption of 12,000 top boxes of cereals)  

Table (5)

Working note (3):

Calculate the amount of estimated premium liability:

Inventory of premiums (top boxes)redeemed }[Number of top boxes redeemed in OctoberOffer of a toy shovel set upon return of 15 top boxes×Cost of a toy shovel set]=12,00015×$3.00=$2,400

Prepare the journal entry to record the sales made during November:

DateAccount Titles and ExplanationsDebit ($)Credit ($)
NovemberCash or Accounts receivable (24,000×$2.80)67,200 
 Sales 67,200
 (To record the sale of 24,000 cereal boxes)  

Table (6)

Prepare the journal entry to record the purchase of shovel set:

DateAccount Titles and ExplanationsDebit ($)Credit ($)
NovemberInventory of premiums (1,083×$3.00)3,249 
     Cash 3,249
 (To record the purchase of toy shovel sets)  

Table (7)

Prepare the journal entry to record the estimated total premium liability:

DateAccount Titles and ExplanationsDebit ($)Credit ($)
NovemberPremium expenses (4)3,360 
 Estimated premium liability 3,360
 (To record the recognition of estimated premium liability)  

Table (8)

Working note (3):

Calculate the total box tops estimated for redemption:

ParticularsAmount ($)Amount ($)
Total box tops outstanding in November 2019 (A)24,000 
Estimated percent redeemed (B)70% 
Total box tops estimated for redemption (C) (A×B) $16,800

Table (9)

Working note (4):

Calculate the amount of premium expenses:

Premium expense = [Total box tops estimated for redemptionOffer of a toy shovel set upon return of 15 top boxes×Cost of a shovel set]=16,80015×($3

2.

To determine

Indicate the way in which the inventory of premiums and the estimated liability would be disclosed in the ending balance sheets of Company YC for the months October, November and December.

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