Question
In: Accounting
Cho Co. includes one coupon in each box of cereal it sells. In return for 5...
Cho Co. includes one coupon in each box of cereal it sells. In return for 5 coupons and $1, customers receive a Cho branded spoon that the company purchases for $2 each. Cho's experience indicates that 40 percent of the coupons will be redeemed. During 2019, 200,000 boxes of cereal were sold, 20,000 spoons were purchased, and 55,000 coupons were redeemed. During 2020, 280,000 boxes of cereal were sold, 25,000 spoons were purchased, and 90,000 coupons were redeemed. The premium payable account balance at the beginning of the 2019 fiscal year was $8,000. Determine the premium expense reported in the income statement and the ending premium liability balance reported in the balance sheet for 2019 and 2020.
2019 Premium Expense: $
2019 Ending Premium Liability: $
2020 Premium Expense: $
2020 Ending Premium Liability: $
Solutions
Expert Solution
1 box= 1 coupan
For 5 coupans = 1spoon
1 spoon = $2
Customer pays for 1 spoon =$1
Premium expense on company per spoon = $1
| Particulars | Year 2019 | Year 2020 |
| Sale of boxes | 200000 | 280000 |
| Coupan issued | 200000 | 280000 |
| Coupan estimated to be redeemed ** | 80000 | 112000 |
| Spoon to be issued (5:1)* | 16000 | 22400 |
| Premium expense for the year | $ 16000 | $ 22400 |
*(80000÷5= 16000 )
*(112000 ÷5 =22400)
**Company expect 40% of coupans will be redeemed
2019 =200000×40% = 80000
2020 =280000 × 40% = 112000
Statement showing premium liability for the year 2019 & 2020
| Particulars |
2019 |
2020 |
| Estimated coupans | 80000 | 112000 |
| LessCoupans redeemed | 55000 | 90000 |
| Future liability of coupans | 25000 | 22000 |
| Spoon (5:1) | 5000 | 4400 |
| Premium liability ( spoon * 1$) | 5000 | 4400 |
Statement showing premium liability balance for year 2019 & 2020
| Particulars | 2019 | 2020 |
| Opening balance | 8000 | 13000 |
| Premium laibility | 5000 | 4400 |
| Closing balance for the year | $ 13000 | $ 17400 |
2019 premium expense = $16000
2019 ending premium liability = $13000
2020 premium expense = $ 22400
2020 ending premium liability = $ 17400
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