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Intermediate Accounting: Reporting...
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Intermediate Accounting: Reporting...
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 $1.80 per box. In 2019, 2,200,000 coupons were redeemed.
Required:
- 1. Prepare the journal entries related to the previous promotion (including sales) for 2019.
- 2. Show how the items related to the premium plan would be reported on the December 31, 2019, balance sheet.
- 3. Next Level What would be the effect on the financial statements if Tiger recorded premium expense as the coupons were redeemed?
1.
Prepare the journal entries in the books of Company TC for 2019.
Prepare the journal entry to record the purchase of the toy trucks:
| Date | Account Titles and Explanations | Debit ($) | Credit ($) |
| 2019 | Inventory of premiums | 300,000 | Â |
| Â | Cash | Â | 300,000 |
| Â | (To record the purchase of toy trucks) | Â | Â |
Table (1)
Prepare the journal entry to record the sales:
| Date | Account Titles and Explanations |
Debit  ($) | Credit ($) |
| 2019 | Cash or accounts receivable | 9,000,000 | Â |
| Â | Sales | Â | 9,000,000 |
| Â | (To record the sales) | Â | Â |
Table (2)
Prepare the journal entry to record the estimate of total premium liability:
| Date | Account Titles and Explanations | Debit ($) | Credit ($) |
| 2019 | Premium expenses (2) | 75,000 | Â |
| Â | Â Â Â Â Â Â Â Estimated premium liability | Â | 75,000 |
| Â | (To record the recognition of estimated premium liability) | Â | Â |
Table (3)
Working note (1):
Calculate the total box tops estimated for redemption:
| Particulars | Amount ($) | Amount ($) |
| Total box tops outstanding in 2019 (A) | 5,000,000 | Â |
| Estimated percent redeemed (B) | 60% | Â |
| Total coupons estimated for redemption (C) | Â | $3,000,000 |
Table (
2.
Identify the manner in which the items related to premium plan would be reported in the balance sheet as of December 31, 2019.
3.
Explain the effects on the financial statements if Company TC recorded the premium expense as the coupons were redeemed.
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