Question

Oriole Co. includes one coupon in each bag of dog food it sells. In return for 4 coupons, customers receive a dog toy that the company purchases for $1.40 each. Oriole's experience indicates that 60 percent of the coupons will be redeemed. During 2020, 109,000 bags of dog food were sold, 13,330 toys were purchased, and 43,600 coupons were redeemed. During 2021, 129,000 bags of dog food were sold, 17,485 toys were purchased, and 64,500 coupons were redeemed.

Determine the premium expense to be reported in the income statement and the premium liability on the balance sheet for 2020 and 2021.

Answer 1

Oriole Co.
Perticulers	2020 ($)	2021 ($)
Premium Expense	$22890	$27090
Premium Liablities	$7630	$ 9030

Calculation is under Below:

• Premium Expense

Premium Expense For 2020

109,000 bags of dog food were sold

Rate $1.40

60 percent of the coupons will be redeemed

So,

109,000 * 60 % = 65400

65400/4 = 16350

16350 *  $1.40 = $22890

Premium Expense For 2021

129,000 bags of dog food were sold,

Rate $1.40

60 percent of the coupons will be redeemed

So,

129,000 * 60% = 77400

77400/4 = 19350

19350 * $1.40 = $27090

• Premium liability

premium liability For 2020

= 109,000(bags of dog food were sold) - 65400 ( 60 percent of the coupons will be redeemed)

= 43600

so 43600/ 4 = 10900

= [16350 - 10900]

= 5450* $1.40

= $ 7630

premium liability For 2021

= 129,000(bags of dog food were sold) - 77400(percent of the coupons will be redeemed)

= 51600

So 51600/4 = 12900

= [ 19350 - 12900]

= 6450

so that

= 6450 * $1.40

= $ 9030