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

ekkarill92 answered 7 months ago
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