Sun Shack Snack Corp sells T rail mix for 750 a box By inclu

Sun Shack Snack Corp. sells T rail mix for $7.50 a box. By including a coupon for a pedometer, the increase sales. If customers redeem the coupon, they can obtain a pedometer for $3.00. The pedometers will cost Sun Shack $8.00 each. Sun Shack estimates that the promotion will be popular: they expect 3,000,000 boxes of trail mix to be sold in 2015 and 10% of the coupons to be redeemed during the promotional period. Of the total coupons expected to be redeemed, 70% of the coupons will be redeemed in 2016 Required: a. Prepare journal entries in support of this year\'s (2015) transactions for the following: i. Sales (all cash) ii. Purchase of pedometers inventory (for cash) iii. Current year redemptions iv. Liability accrual at end of 2015 What is the rationale for the entries recorded? b.

Solution

PART-1) a)

Debit

Credit

Dr. Cash

22,500,000

Cr. Sales

22,500,000

Estimated redemption: 3,000,000 * 40% = 1,200,00\';

1,200,000/4 box tops = 300,000 pedometers

b)

Dr. Promotion Inventory

2,400,000

Cr. Cash

2,400,000

300,000 * $8

Cost of pedometers

300,000 * $8

2,400,000

Payment with redemption

300,000 * $3

-900,000

Estimated promotion liability

1,500,000

c)

Dr. Cash

270,000

Dr. Premium Expense

450,000

Promotion Inventory

720,000

300,000 * 30% * $3; 300,000 * 30% * $8

d)

To accrue remaining liability net of cash to be received

Premium Expense

1,050,000

300,000 * 70% * ($8 - $3)

PART-2) The company making an attempting to match cost (the premium) with the revenue (rise in sales of trail mix) current year. It has a liability for future premium redemptions due to:

--There has been a previous event (trail mix sale)

--An expected future sacrifice of economic gains (providing away promotion inventory)

	Debit	Credit
Dr. Cash	22,500,000
Cr. Sales		22,500,000