Question

Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Palmer Frosted Flakes boxes and $1. The company estimates that 60% of the boxtops will be redeemed. In 2018, the company sold 1,350,000 boxes of Frosted Flakes and customers redeemed 660,000 boxtops receiving 220,000 bowls. If the bowls cost Palmer Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2018?

a. $540,000
b. $100,000
c. $150,000
d. $276,000

Answer 1

The liability for outstanding premiums that Palmer Company should record is $150,000, which is calculated by applying the estimated 60% redemption rate to the total number of boxes sold, then taking into account the number of redeemed bowls, and finally multiplying the outstanding number of bowls by the cost per bowl.

Step-by-step explanation:

The liability for outstanding premiums is the amount the Palmer Company must record on its balance sheet to cover the cost of all the premiums (cereal bowls) it expects to distribute but have not yet been claimed. To calculate this liability, we need to estimate the number of boxes that will be redeemed for the bowls and not just the number of boxtops already redeemed. The company estimates a 60% redemption rate, which can be applied to the total number of boxes sold to estimate expected redemptions.

To calculate the expected number of redemptions:

1. The company sold 1,350,000 boxes and estimates a 60% redemption rate, so we expect 1,350,000 × 60% = 810,000 boxtops to be sent in.
2. Since it takes 3 boxtops for one bowl, this results in an expected 810,000 / 3 = 270,000 bowls to be redeemed.
3. With 220,000 bowls already redeemed, that leaves 270,000 - 220,000 = 50,000 bowls outstanding.
4. At a cost of $3 per bowl, this results in a liability of 50,000 × $3 = $150,000.

Therefore, the correct answer is option (c) $150,000.

Answer 2

b. $100,000

Step-by-step explanation:

Because the company estimates that 60% of the boxtops will be redeemed and the actual sold boxes was 1,350,000; the the estimated boxtops to be returned is 810,000 (= 60% * 1,350,000)

In 2018, customers redeemed 660,000 boxtops, then estimated of boxtops not redeemed is 150,000 boxtops

As the campaign regulated, 3 boxtops is received back 1 bowl, the company will have to redeem 50,000 bowl for 150,000 boxtops (50,000 = 150,000/3)

For each bowl, the company can receive $1 back from customer and cost $3, so the net cost is $2 (= $3-$1)

The liability for outstanding premiums should be recorded at the end of 2018 is $100,000 (=$2 x 50,000)