1.-Premiums Irwin Music Shop gives its customers coupons redeemable for a poster

Question

1.-Premiums Irwin Music Shop gives its customers coupons redeemable for a poster plus a Bo One coupon is issued for each dollar of sales. On the surrender of 100 coupons and cash, the poster and CD are given to the customer. It is estimated that 80%of the coupo be presented for redemption. Sales for the first period were $700,000, and the coupons redeemed totaled 420,000. Sales for the second period were $840,000, and the coupons redeemed totaled 750,000. Irwin Music Shop bought 20,000 posters at $2.50/poster and 20 CDs at $7.50/CD Diddley CD ,000 Instructions 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. a. Record purchase of posters and CDs b. Calculate and record first period estimated liability c. Calculate and record first period coupons redeemed d. Calculate and record second period estimated liability e. Calculate and record second period coupons redeemed

Explanation / Answer

Account Titles and Explanation Debit Credit a. Inventory of Premium Posters $50,000 Inventory of CDs $150,000 To Cash $200,000 b. Estimated Liability = ((700000*.8)-420000)/100)*(2.5+7.5-6)=$6,400 Premium Expense ( (700000*.8)-420000)/100 *(2.5+7.5-6)) $6,400 To Premium Liability $6,400 c. Premium Expense = 420000/100*(2.5+7.5-6)=16800 Premium Expense ( 420,000/100* (2.5+7.5-6)) $16,800 Cash ( ( 420,000/100* 6) $25,200    To Inventory of Premium Posters ( 420,000/100* 2.5) $10,500    To Inventory of CDs ( 420,000/100* 7.5) $31,500 d In first year (700,000 * 0.8 = 560,000 was estimated however only 420,000 redeemed so 140,000 coupons are left from first period. For second sale ( 840,000*0.8 = 672,000 ) total required 672,000 + 140,000 = 812,000 812,000 - 750,000 redeemed = left 62,000 Estimated Liability = 62000/100*(2.5+7.5-6)= $2,480 Premium Expense $2,480 To Premium Liability (62000/100*(2.5+7.5-6) $2,480 e. Premium expense is ((750000-420000)/100*(10-6))   = $13,200 Liability   already created                                                =   (6400) Premium expense to be recorded                                 = $6800 Premium Liability $6,400 Premium Expense $6,800 Cash ((750000-420000)/100*6) $19,800    To Inventory of Premium Posters ((750000-420000)/100* 2.5)) $8,250    To Inventory of CDs ((750000-420000)/100* 7.5) $24,750

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