Question

Blossom Music Shop gives its customers coupons redeemable for a poster plus a Bo Diddley CD. One coupon is issued for each dollar of sales. On the surrender of 100 coupons and $6.00 cash, the poster and CD are given to the customer. It is estimated that 80% of the coupons will be presented for redemption. Sales for the first period were $720,000, and the coupons redeemed totaled 415,000. Sales for the second period were $860,000, and the coupons redeemed totaled 740,000. Blossom Music Shop bought 20,000 posters at $2.0/poster and 20,000 CDs at $7.0/CD. Prepare the following entries for the two periods, assuming all the coupons expected to be redeemed from the first period were redeemed by the end of the second period. To record coupons redeemed. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Period 1 Account Titles and Explanation Debit Credit Period 2 Account Titles and Explanation Debit Credit SHOW LIST OF ACCOUNTS

To record estimated liability. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Period 1 Account Titles and Explanation Debit Credit Period 2 Account Titles and Explanation Debit Credit

Answer 1

Answer:-

		Period 1	Period 2
	Entry	Debit	Credit	Debit	Credit
a.	Cash [415000/100 = 4150 x $6]; [740000/100 = 7400 x $6]	24,900		44,400
	Premium liability			9,150
	Premium Expense [4150 x ($2.00 + $7.00 - $6.00)];[(7400 - 3,050) x ($2.00 + $7.00 - $6.00)]	12,450		13,050
	Inventory of Premiums [4150 x ($2.00 + $7.00)];[7400 x ($2.00 + $7.00)]		37,350		66,600
	(To record coupons redeemed)
b.	Premium Expense	9,150		7,590
	Premium liability		9,150		7,590
	(To record estimated liability)

Working:

Period 1:

Number of coupons expected to be redeemed = $720000/100 = 7200 x 80% = 5760

Actually redeemed = 4150

Premium liability = [(7200 - 4150) x ($2.00 + $7.00 - $6.00)] = 3,050x $3 = $9,150

Period 2:

Number of coupons expected to be redeemed = $860000/100 = 8600 x 80% = 6,880

Actually redeemed = 7400

Premium liability = [(3,050+ 6,880- 7400) x ($2.00 + $7.00 - $6.00)] = 2,530x $3 = $7,590