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In: Accounting

Waterway Industries includes one coupon in each bag of dog food it sells. In return for...

Waterway Industries includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Waterway $3 each. Waterway estimates that 50 percent of the coupons will be redeemed. Data for 2020 and 2021 are as follows:

2020 2021
Bags of dog food sold 490000 590000
Leashes purchased 20000 22000
Coupons redeemed 110000 150000


The premium liability at December 31, 2020 is

$44375.

$50625.

$66375.

$54375.

Solutions

Expert Solution

The premium liability at December 31, 2020 is calculated as follows:
The number of coupon to be redeemed is 50 % of dog food sold

The number of coupons to be redeemed = 490,000 * 50%

                                                         = 245,000 coupons

But, actual number of coupons are redeemed = 110,000 coupons

Therefore, the unclaimed coupons for 2020 = 245,000 coupons - 110,000 coupons

                                                              = 135,000 coupons

Number of lashes = 135,000 coupons / 8 coupons

                          = 16,875 lashes

Therefore, premium liability at December 31, 2020 = Number of lashes * Cost for each leash

                                                                         = 16,875 lashes * $3

                                                                          = $50,625

The premium liability at December 31, 2020 is $50,625

So correct answer is option (2) or $50,625

ekkarill92 answered 2 years ago
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