Question

Crispy Breakfast places a coupon in each box of its cereal product. Customers may send in five coupons and $3, and the company will send them a recipe book. Sufficient books were purchased at a cost of $5 each. A total of 500,000 boxes of product were sold in the current year. It was estimated that 4% of the coupons would be redeemed. During current year, 9,000 coupons were redeemed. What is Crispy's premium expense for 2013

Answer 1

$8,000

Step-by-step explanation:

premium expense = [(500,000 x 4%) / 5] x ($5 - $3) = 4,000 x $2 = $8,000

the journal entry to record this:

Dr Premium expense 8,000

Cr Estimated premium claims outstanding 8,000

Since the customers must send 5 coupons + $3 in order to get the free recipe book, the actual cost per recipe book = $5 - $3 = $2 per book

in total, the company estimates that 20,000 coupons will be redeemed, but you need 5 coupons per book, so that mean that 4,000 recipe books are expected to be handed out.