1.
Prepare the journal entries in the books of Company TC for 2016.
1.
Explanation of Solution
Prepare the
Date | Account Titles and Explanations | Debit ($) | Credit ($) |
2016 | Inventory of premiums | 300,000 | |
Cash | 300,000 | ||
(To record the purchase of toy trucks) |
Table (1)
Prepare the journal entry to record the sales:
Date | Account Titles and Explanations |
Debit ($) | Credit ($) |
2016 | Cash or accounts receivable | 9,000,000 | |
Sales | 9,000,000 | ||
(To record the sales) |
Table (2)
Prepare the journal entry to record the estimate of total premium liability:
Date | Account Titles and Explanations | Debit ($) | Credit ($) |
2016 | Premium expenses (2) | 75,000 | |
Estimated premium liability | 75,000 | ||
(To record the recognition of estimated premium liability) |
Table (3)
Working note (1):
Calculate the total box tops estimated for redemption:
Particulars | Amount ($) | Amount ($) |
Total box tops outstanding in 2016 (A) | 5,000,000 | |
Estimated percent redeemed (B) | 60% | |
Total coupons estimated for redemption (C) | $3,000,000 |
Table (4)
Working note (2):
Calculate the amount of premium expenses:
Prepare the journal entry to record the redemption of 2,200,000 coupons in 2016:
Date | Account Titles and Explanations | Debit ($) | Credit ($) |
2016 | Cash | 220,000 | |
Estimated premium liability | 55,000 | ||
Inventory of premiums | 275,000 | ||
(To record the redemption of 2,200,000 coupons) |
Table (5)
2.
Identify the manner in which the items related to premium plan would be reported in the
2.
Explanation of Solution
Balance sheet: Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.
Prepare the partial balance sheet as of December 31, 2016.
Company TC | |
Balance Sheet Statement (Partial) | |
As at December 31, 2016 | |
Assets | Amount |
Current assets: | |
Inventory of premiums (3) | $25,000 |
Liabilities | Amount |
Current liabilities: | |
Estimated premium liability (4) | $20,000 |
Table (6)
Working note (3):
Determine the amount of inventory premium as at December 31, 2016.
Working note (4):
Determine the amount of estimated premium liability as at December 31, 2016.
3.
Explain the effects on the financial statements if Company TC recorded the premium expense as the coupons were redeemed.
3.
Explanation of Solution
Effects on the financial statements:
The premium was offered by Company TC to increase the sales and the redemption of coupons is probable and that can be reasonably estimated. Thus, Company TC must record the estimate as an expense and the related liability during the sales period. If the estimate is not made, then the expenses will not match properly against the sales premium. As an effect of this Company TC’s expense would be understated by $20,000. In addition to this, Company TC’s liability will not properly reflect the probable obligation of the company. Thus, Company TC’s liability will be understated by $20,000.
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- Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning