To stimulate the sales of its Alladin breakfast cereal Teal

To stimulate the sales of its Alladin breakfast cereal, Teal Company places 1 coupon in each box. 5 coupons are redeemable for a premium consisting of a children’s hand puppet. In 2018, the company purchases 41,000 puppets at $1.55 each and sells 491,000 boxes of Alladin at $3.80 a box. From its experience with other similar premium offers, the company estimates that 40% of the coupons issued will be mailed back for redemption. During 2018, 138,000 coupons are presented for redemption.

Prepare the journal entries that should be recorded in 2018 relative to the premium plan. (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

(To record the premium inventory.)

(To record the sales.)

(To record the expense associated with the sale.)

(To record the premium liability.)

Solution

Solution:

Debit

Credit

1

Dr. Premium puppets inventory

63,550

Cr. Cash

63,550

(41,000 puppets at $1.55 each)

2

Dr. Cash

1,865,800

Cr. Sales

1,865,800

(491,000 boxes of Alladin at $3.80)

3

Dr. Premium Expense

42,780

Cr. Premium puppets inventory

42,780

(138,000 / 5 * $1.55)

4

Dr. Premium expense

16,988

Cr. Estimated Liability for Premiums

16,988

Working:

Total coupons issued

491,000

Total estimated redemptions

196400

Coupons redeemed

-138000

Estimated future redemptions

58400

Cost of estimated claims outstanding

16,988