Question

In December Year 4, Mill Co. began including one coupon in each package of candy that it sells and offering a toy in exchange for $.30 and one coupon. The toys cost Mill $.80 each. Eventually, 70% of the coupons will be redeemed. During December, Mill sold 100,000 packages of candy and 15,000 coupons were redeemed. In its Year 4 income statement, what amount should Mill report as Premium Expense?

Answer 1

$35,000

Step-by-step explanation:

Sine Mill expects that 70% of the coupons will be redeemed, their premium expense should equal 70% x 100,000 packages x ($0.80 - $0.30) = $35,000

the journal entry to record the issuing of the discount coupons should be:

Dr Premium (or toy coupons, or marketing) expense 35,000

Cr Toy coupons liability 35,000

Since 15,000 were redeemed in December, the adjusting entry should be:

December 31, year 4

Dr Toy coupons liability 7,500

Cr Toys inventory 7,500