Question

Sanders Co. includes one coupon in each bag of cat food it sells. In return for 4 coupons, customers receive a teddy bear that the company purchases for $1.20 each. Sanders's experience indicates that 60 percent of the coupons will be redeemed. During 2018, 100,000 bags of cat food were sold, 12,000 teddy bears were purchased, and 50,000 coupons were redeemed. During 2019, 120,000 bags of cat food were sold, 16,000 teddy bears were purchased, and 60,000 coupons were redeemed.

1. Calculate the premium liability at the end of 2018. Show your workings.

2. Calculate the actual number of teddy bears given to customers in 2019. Show your workings.

3. Why do companies want to offer premium to customers? Explain the accounting principle and treatment for consideration payable.

4. A clerical staff has tried to calculate the premium expense to be shown in the income statement for 2018. He said that the figure of actual number of coupons redeemed in year 2018 is required in order to calculate the premium expense for 2018. Do you agree with him? Why? Also, he argued that the figure of sales volume of cat food in 2018 is not required to calculate the premium expense for 2018. Do you agree with him? Why? (No need to show any calculation)

5. The clerical staff also said that the sales volume of cat food in 2018 is not relevant for him to calculate the premium liability at 31 Dec 2018. Do you agree with him? Explain the reasons. (No need to show any calculation)

6. If cash with an amount of less than $1.2 is received from customer for each teddy bear given, explain how this would affect the premium expense in 2018? (No need to show any calculation)

7. If cash with an amount of less than $1.2 is received from customer for each teddy bear given, explain how this would affect the premium liability at the end of 2018? (No need to show any calculation)
8. The clerical staff argued that if the sales volume of cat food in 2018 is recorded wrongly, it would not have any effect on the accurateness of the premium liability at the end of 2019, because premium liability at the end of 2019 is related to sales volume of cat food in 2019, but not related to the sales volume of cat food in 2018. Do you agree with him? Explain the reasons. (No need to show any calculation)

Answer 1

Sale (in no.of bags)	100000
Coupon /bag of sale=	1
total No.of coupons	100000
No.of coupons likely to be redeemed=(100000*1*60%)=	60000
No.of teddy bears /4 coupons that was redeemed in 2018	15000
No.of teddy bears purchased in 2018	12000
So,liability	3000
So,premium liability at the end of 2018=	3000*1.2=
$	3600
So,
actual number of teddy bears given to customers in 2019	16000-3000=
	13000

Companies want to offer premium to customers, so as to boost sale of the prime item , their main item of sale, here, the cat food.

Yes.The clerical staff is right in telling that the figure of actual number of coupons redeemed in year 2018 is required in order to calculate the premium expense for 2018

From the above calculations, it can be seen that actual no.of coupons redeemed/4 no.of coupons= that much no.of teddy bears to be given & that no.* $ 1.2= $ value of teddy bears to be expensed in the income statement of the year --the balance coupons yet to be redeemed / 4 no.of coupons= that much no.of teddy bears that might be reqd. & that no.* $ 1.2= $ value of liability that is to be provided for $ value of teddy bears that might be claimed, based on 60% redeeming possibility.

No.The figure of sales volume of cat food in 2018 is very much required to calculate the premium expense for 2018--as then only we will know the no.of bags of cat food sale --1 coupon for each bag of sale & 4 such coupons redeemed for a teddy bear, each costing $ 1.20.

NO.Again as explained above, the sales volume of cat food in 2018 is very much relevant for him to calculate the premium liability at 31 Dec 2018--- as it is the balance yet to be claimed by the customers.

1 Teddy bear costing $ 1.2 is given to customers --who come with 4 coupons ,ie. After having purchased 4 bags of cat food.So, Premium expense that is incurred as sales promotion expense, will not be affected , even if customers pay less than $ 1.2.This is part of catfood co.'s cost.

Again, the sam eway.

1 Teddy bear costing $ 1.2 is given to customers --who come with 4 coupons ,ie. After having purchased 4 bags of cat food.So, Premium liability created on a/c of cat food sale, will not be affected , even if customers pay less than $ 1.2.

No. Recording the sales volume of cat food in 2018 is wrongly, will affect the liability at end of 2019 --as seen above, 3000 teddy bears at cost of 3600 had been given in 2019 , on a/c of 2018 sales. So, that much less would have been met for 2019 sales--which will be reflected as liability, at end of 2019.