Question

The Easy Pack Company includes one coupon having no expiration date with its deluxe snack pack. Upon return of 10 coupons, Easy Pack will send a silver chip clip, which costs Easy Pack $1.50 each. Past experience indicates that 30% of coupons issued will be redeemed. Easy Pack began this promotion in 2017 and sold 1,000,000 deluxe snack packs. During 2017, 90,000 coupons were received and 9,000 chips clips were distributed to customers. The December 31, 2017, balance sheet should include a liability for coupons outstanding of:

Answer 1

premium liability (coupon oustanding) $ 1,500

Step-by-step explanation:

We will recognize a liablity based on expected coupon redemption of 10%:

Sold 1,000,000 deluxe snack = 1,000,000 coupon

from this we expect 10% will be redeem: 1,000,000 x 10% = 100,000

Then, calculate the cost that this coupon will generate:

Thre will be 100,000 redeem coupons which, every 10 is traded for a 1.50 silver chip clip:

100,000 / 10 x $ 1.50 = $ 15,000

For the sales of we have a premium liablity of 15,000

premium expense 15,000

premium liaiblity 15,000

We also purchase this silver chip clip:

Premium Inventory 15,000

Cash 15,000

During the year, we adjust for the chips clips distributed:

9,000 x $ 1.50 = 13,500

This decreases both, the liablity and the premium inventory.

Premium Liability 13,500 debit

Premium Inventory 13,500 credit

Adjusted year-end balance:

15,000 - 13,500 = 1,500