Question

Larkspur offers an MP3 download (seven-single medley) as a premium for every 6 candy bar wrappers presented by customers together with $2.65. The candy bars are sold by the company to distributors for 30 cents each. The purchase price of each download code to the company is $2.40. In addition, it costs 50 cents to distribute each code. The results of the premium plan for the years 2020 and 2021 are as follows. (All purchases and sales are for cash.)

		2020		2021
MP3 codes purchased		375,000		495,000
Candy bars sold		2,659,900		2,812,000
Wrappers redeemed		1,800,000		2,250,000
2020 wrappers expected to be redeemed in 2021		435,000
2021 wrappers expected to be redeemed in 2022				525,000

Part 1

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Prepare the journal entries that should be made in 2020 and 2021 to record the transactions related to the premium plan of the Larkspur. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 1,525.)

Account Titles and Explanation	Debit	Credit
2020
(To record the premium inventory.)
(To record the sales.)
(To record the expense associated with the sale.)
(To record the premium liability.)
2021
(To record the premium inventory.)
(To record the sales.)
(To record the expense associated with the sale.)
(To record the premium liability.)

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Part 2

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Indicate the amounts for each accounts, and classifications of the items related to the premium plan that would appear on the balance sheet and the income statement at the end of 2020 and 2021.

		Amount
Account		2020		2021		Classification
Inventory of Premiums		$		$		Property, Plant and EquipmentLong-term InvestmentsSelling ExpenseStockholders' EquityCurrent LiabilityCurrent Asset
Premium Liability						Long-term InvestmentsProperty, Plant and EquipmentStockholders' EquitySelling ExpenseCurrent LiabilityCurrent Asset
Premium Expense						Long-term InvestmentsSelling ExpenseStockholders' EquityCurrent AssetProperty, Plant and EquipmentCurrent Liability

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Answer 1

Answer:

Part 1:

No.	Date	General Journal	Debit	Credit
	2020
1		Inventory of premiums	900,000
		Cash		900,000
		To record the premium inventory
2		Cash	797,970
		Sales Revenue		797,970
		To record the sales.
3		Cash	645,000
		Premium expense	75,000
		Inventory of premiums		720,000
		To record the expense associated with the sale.
4		Premium expense	18,125
		Premium Liability		18,125
		To record the premium liability

No.	Date	General Journal	Debit	Credit
	2021
1		Inventory of premiums	1,188,000
		Cash		1,188,000
		To record the premium inventory
2		Cash	843,600
		Sales Revenue		843,600
		To record the sales
3		Cash	806,250
		Premium liability	18,125
		Premium expense	75,625
		Inventory of premiums		900,000
		To record the expense associated with the sale
4		Premium expense	21,875
		Premium Liability		21,875
		To record the premium liability

Part 2:

	2020	2021	Classification
Inventory of Premiums	180,000	468,000	Current Asset
Premiums Liability	18,125	21,875	Current Liability
Premium Expense	93,125	97,500	Selling expense

Calculation:

To prepare the journal entries we need to do the following calculations:

Computation of premium expenses:

Wrappers redeemed (a)	1,800,000	2,250,000
MP3 codes redeemed (b) = (a)/6	300,000	375,000
Premium expenses (b) x 2.4	720,000	900,000
Add ditribution cost (c) = (b) x 0.50	150,000	187,500
Total (d)	870,000	1,087,500
Less cash received (e) = (b) x 2.65	795,000	993,750
Less Premium liability (e)		18,125
Premium expenses (d) - (e) - (f)	75,000	75,625
Net Cash received (d) - (c)	645,000	806,250

Computation of premium liability:

Wrappers redeemed (a)	435,000	525,000
MP3 codes redeemed (b) = (a)/6	72,500	87,500
Premium expenses(b) x 2.4	174,000	210,000
Add ditribution cost(c) = (b) x 0.50	36,250	43,750
Total (d)	210,250	253,750
Less cash received (e) = (b) x 2.65	192,125	231,875
Premium expenses (d) - (e)	18,125	21,875

So, the entry calculation will be:

2020:

Entry #1: To record the premium inventory

Inventory of premiums = 375,000 x 2.4 = 900,000

Entry #2: To record the sales

Sales Revenue = 265,9900 x 0.30 = 843,600

Entry #3: To record the expense associated with the sale

Cash = 795,000 - 150,000 = 645,000

2021:

Entry #1: To record the premium inventory

Inventory of premiums = 495,000 x 2.4 = 1,188,000

Entry #2: To record the sales

Sales Revenue = 2,812,000 x 0.30 = 797,970

Entry #3: To record the expense associated with the sale

Cash = 993,750 - 187,500 = 806,250