BuyFindarrow_forward

Intermediate Accounting: Reporting...

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

Solutions

Chapter
Section
BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
22 views

Premium Obligation On the back of its cereal boxes, Tiger Cereal Company offers a premium to its customers. The premium, a toy truck, may be claimed by sending in $1 plus 10 coupons; one coupon is included in each box of cereal sold. Tiger estimates, based on past experience, that 60% of the coupons will be redeemed. During 2019, Tiger purchased 240,000 toy trucks at $1.25 each for the premium promotion and sold 5,000,000 boxes of cereal at $1.80 per box. In 2019, 2,200,000 coupons were redeemed.

Required:

  1. 1. Prepare the journal entries related to the previous promotion (including sales) for 2019.
  2. 2. Show how the items related to the premium plan would be reported on the December 31, 2019, balance sheet.
  3. 3. Next Level What would be the effect on the financial statements if Tiger recorded premium expense as the coupons were redeemed?

1.

To determine

Prepare the journal entries in the books of Company TC for 2019.

Explanation

Prepare the journal entry to record the purchase of the toy trucks:

DateAccount Titles and ExplanationsDebit ($)Credit ($)
2019Inventory of premiums300,000 
 Cash (240,000×$1.25) 300,000
 (To record the purchase of toy trucks)  

Table (1)

Prepare the journal entry to record the sales:

DateAccount Titles and Explanations

Debit

 ($)

Credit ($)
2019Cash or accounts receivable9,000,000 
 Sales (5,000,000×$1.80) 9,000,000
 (To record the sales)  

Table (2)

Prepare the journal entry to record the estimate of total premium liability:

DateAccount Titles and ExplanationsDebit ($)Credit ($)
2019Premium 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:

ParticularsAmount ($)Amount ($)
Total box tops outstanding in 2019 (A)5,000,000 
Estimated percent redeemed (B)60% 
Total coupons estimated for redemption (C) (A×B) $3,000,000

Table (

2.

To determine

Identify the manner in which the items related to premium plan would be reported in the balance sheet as of December 31, 2019.

3.

To determine

Explain the effects on the financial statements if Company TC recorded the premium expense as the coupons were redeemed.

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

What does the invisible hand of the marketplace do?

Principles of Macroeconomics (MindTap Course List)

PV AND LOAN ELIGIBILITY You have saved 4,000 for a down payment on a new car. The largest monthly payment you c...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

Why is historical experience often a poor basis for establishing standards?

Cornerstones of Cost Management (Cornerstones Series)