Chapter 9, Problem 16P

Premium Obligation Yummy Cereal Company is offering one toy shovel set for 15 box tops of its cereal. Year-to-date sales have been off, and it is hoped that this offer will stimulate demand. Each shovel set costs the company $3. The following data are available for the last 3 months of 2019:

It is estimated that only 70% of the box tops will be redeemed. The cereal sells for $2.80 per box.

Required:

1. 1. Prepare journal entries for each month to record sales, shovel set purchases, and redemptions.
2. 2. Assuming Yummy prepares monthly financial statements, indicate how the inventory of premiums and the estimated liability would be disclosed on Yummy’s ending balance sheets for October, November, and December.

To determine

Prepare the journal entry to record the sales, shovel set purchases and redemption for each month in the books of Company YC.

Explanation of Solution

Prepare the journal entry to record the sales made during October:

Date	Account Titles and Explanations	Debit ($)	Credit ($)
October	Cash or Accounts receivable $\left(21,000\times \$2.80\right)$	58,800
	Sales		58,800
	(To record the sale of 21,000 cereal boxes)

Table (1)

Prepare the journal entry to record the purchase of shovel set:

Date	Account Titles and Explanations	Debit ($)	Credit ($)
October	Inventory of premiums $\left(880\times \$3.00\right)$	2,640
	Cash		2,640
	(To record the purchase of toy shovel sets)

Table (2)

Prepare the journal entry to record the estimated total premium liability:

Date	Account Titles and Explanations	Debit ($)	Credit ($)
October	Premium expenses (2)	2,940
	Estimated premium liability		2,940
	(To record the recognition of estimated premium liability)

Table (3)

Working note (1):

Calculate the total box tops estimated for redemption:

Particulars	Amount ($)	Amount ($)
Total box tops outstanding in October 2019 (A)	21,000
Estimated percent redeemed (B)	70%
Total box tops estimated for redemption (C) $\left(\text{A}\times \text{B}\right)$		14,700

Table (4)

Working note (2):

Calculate the amount of premium expenses:

$\begin{array}{c}\text{Premium expense = }\left[\begin{array}{l}\frac{\text{Total box tops estimated for redemption}}{\text{Offer of a toy shovel set upon return of 15 top boxes}}\\ \times \text{Cost of a shovel set}\end{array}\right]\\ =\frac{14,700}{15}\times \left(\$3.00\right)\\ =\$2,940\end{array}$

Prepare the journal entry to record the redemption of 12,000 top boxes in October:

Date	Account Titles and Explanations	Debit ($)	Credit ($)
October	Estimated premium liability (3)	2,400
	Inventory of premiums		2,400
	(To record the redemption of 12,000 top boxes of cereals)

Table (5)

Working note (3):

Calculate the amount of estimated premium liability:

$\begin{array}{c}\begin{array}{l}\text{Inventory of premiums }\\ \left(\text{top boxes}\right)\text{redeemed }\end{array}\}\text{= }\left[\begin{array}{l}\frac{\text{Number of top boxes redeemed in October}}{\text{Offer of a toy shovel set upon return of 15 top boxes}}\times \\ \text{Cost of a toy shovel set}\end{array}\right]\\ =\frac{12,000}{15}\times \$3.00\\ =\$2,400\end{array}$

Prepare the journal entry to record the sales made during November:

Date	Account Titles and Explanations	Debit ($)	Credit ($)
November	Cash or Accounts receivable $\left(24,000\times \$2.80\right)$	67,200
	Sales		67,200
	(To record the sale of 24,000 cereal boxes)

Table (6)

Prepare the journal entry to record the purchase of shovel set:

Date	Account Titles and Explanations	Debit ($)	Credit ($)
November	Inventory of premiums $\left(1,083\times \$3.00\right)$	3,249
	Cash		3,249
	(To record the purchase of toy shovel sets)

Table (7)

Prepare the journal entry to record the estimated total premium liability:

Date	Account Titles and Explanations	Debit ($)	Credit ($)
November	Premium expenses (4)	3,360
	Estimated premium liability		3,360
	(To record the recognition of estimated premium liability)

Table (8)

Working note (3):

Calculate the total box tops estimated for redemption:

Particulars	Amount ($)	Amount ($)
Total box tops outstanding in November 2019 (A)	24,000
Estimated percent redeemed (B)	70%
Total box tops estimated for redemption (C) $\left(\text{A}\times \text{B}\right)$		$16,800

Table (9)

Working note (4):

Calculate the amount of premium expenses:

$\begin{array}{c}\text{Premium expense = }\left[\begin{array}{l}\frac{\text{Total box tops estimated for redemption}}{\text{Offer of a toy shovel set upon return of 15 top boxes}}\\ \times \text{Cost of a shovel set}\end{array}\right]\\ =\frac{16,800}{15}\times \left(\$3.00\right)\\ =\$3,360\end{array}$

Prepare the journal entry to record the redemption of 16,005 top boxes in October:

Date	Account Titles and Explanations	Debit ($)	Credit ($)
October	Estimated premium liability (5)	3,201
	Inventory of premiums		3,201
	(To record the redemption of 16,005 top boxes of cereals)

Table (10)

Working note (5):

Calculate the amount of estimated premium liability:

$\begin{array}{c}\begin{array}{l}\text{Inventory of premiums }\\ \left(\text{top boxes}\right)\text{redeemed }\end{array}\}\text{= }\left[\begin{array}{l}\frac{\text{Number of top boxes redeemed in November}}{\text{Offer of a toy shovel set upon return of 15 top boxes}}\times \\ \text{Cost of a toy shovel set}\end{array}\right]\\ =\frac{16,005}{15}\times \$3.00\\ =\$3,201\end{array}$

Prepare the journal entry to record the sales made during December:

Date	Account Titles and Explanations	Debit ($)	Credit ($)
December	Cash or Accounts receivable $\left(33,000\times \$2.80\right)$	92,400
	Sales		92,400
	(To record the sale of 33,000 cereal boxes)

Table (11)

Prepare the journal entry to record the purchase of shovel set:

Date	Account Titles and Explanations	Debit ($)	Credit ($)
December	Inventory of premiums $\left(1,697\times \$3.00\right)$	5,091
	Cash		5,091
	(To record the purchase of toy shovel sets)

Table (12)

Prepare the journal entry to record the estimated total premium liability:

Date	Account Titles and Explanations	Debit ($)	Credit ($)
November	Premium expenses (7)	4,620
	Estimated premium liability		4,620
	(To record the recognition of estimated premium liability)

Table (13)

Working note (6):

Calculate the total box tops estimated for redemption:

Particulars	Amount ($)	Amount ($)
Total box tops outstanding in December 2019 (A)	33,000
Estimated percent redeemed (B)	70%
Total box tops estimated for redemption (C) $\left(\text{A}\times \text{B}\right)$		$23,100

Table (14)

Working note (7):

Calculate the amount of premium expenses:

$\begin{array}{c}\text{Premium expense = }\left[\begin{array}{l}\frac{\text{Total box tops estimated for redemption}}{\text{Offer of a toy shovel set upon return of 15 top boxes}}\\ \times \text{Cost of a shovel set}\end{array}\right]\\ =\frac{23,100}{15}\times \left(\$3.00\right)\\ =\$4,620\end{array}$

Prepare the journal entry to record the redemption of 20,475top boxes in October:

Date	Account Titles and Explanations	Debit ($)	Credit ($)
October	Estimated premium liability (8)	4,149
	Inventory of premiums		4,149
	(To record the redemption of 20,475 top boxes of cereals)

Table (15)

Working note (8):

Calculate the amount of estimated premium liability:

$\begin{array}{c}\begin{array}{l}\text{Inventory of premiums }\\ \left(\text{top boxes}\right)\text{redeemed }\end{array}\}\text{= }\left[\begin{array}{l}\frac{\text{Number of top boxes redeemed in December}}{\text{Offer of a toy shovel set upon return of 15 top boxes}}\times \\ \text{Cost of a toy shovel set}\end{array}\right]\\ =\frac{20,475}{15}\times \$3.00\\ =\$4,149\end{array}$

To determine

Indicate the way in which the inventory of premiums and the estimated liability would be disclosed in the ending balance sheets of Company YC for the months October, November and December.

Explanation of Solution

Balance sheet: Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the partial balance sheet to record the inventory of premiums and the estimated liability:

Company YC
Balance Sheet Statement (Partial)
	At The End of
Assets	October	November	December
Current assets:
Inventory of premiums	$240	$288	$1,230
Liabilities	October	November	December
Current liabilities:
Estimated premium liability	$540	$699	$1,170

Table (16)

Prepare the T-accounts to determine the estimated premium liability and inventory of premiums: