The creamy candy company offers a coffee mug for a $1.00, as a premium for every

Question

The creamy candy company offers a coffee mug for a $1.00, as a premium for every ten candy bar wrappers presented by customers the purchase of each mug to the company is $5.00; Historically, Creamy expects about 20% of its wrappers to be redeemed. The results of the premium plan for the 2015 are as follows ( assume all purchase and sales are for cash) :

Coffee mugs purchased 60,000

Candy bars sold 3,000,000

Actual Wrappers redeemed in 2015 200,000

Instructions---

a) Prepare a schedule detailing the calculation of premium expense for 2015 in good form.

b) Prepare the general journal entries to record the liability accural and premium redemtion that should be made in 2015 related to the above plan by Creamy Candy.

Explanation / Answer

Answer a. Calculation of premium Exp. For 2015 Candy Bar Sold in nos 3,000,000 Expected Wrapper to be Redeemed 600000 Expected Premium Liability - 600,000 / 10 Nos) X $4 240000 Answer b. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1 Premium Exp.                                                Dr. 240000    To Estimated Liability for Premium 240000 Estimated Liability for Premium = (3,000,000 Wrapers X 20%) 10 Nos X $4 = $240,000 2 Cash                                                                    Dr.                20,000 Estimated Liability for Premium            Dr.                60,000    To Inventory of Premium Mugs                  80,000 Cash Recd for Mugs = 2,00,000 / 10 wrappers X $1 = $20000 Estimated Liability for Premium Exp. = 200,000 / 10 Wrappers X $4 = $80,000

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