Question 6: Balley Co. includes one coupon in each bag of dog food it sells. In

ID: 2418941 • Letter: Q

Question

Question 6:

Balley Co. includes one coupon in each bag of dog food it sells. In return for 3 coupons, customers receive a dog toy that the company purchases for $1.50 each. Balley's experience indicates that 60 percent of the coupons will be redeemed. During 2004, 100,000 bags of dog food were sold, 12,000 toys were purchased, and 45,000 coupons were redeemed. During 2005, 120,000 bags of dog food were sold, 16,000 toys were purchased, and 60,000 coupons were redeemed.

Instructions

Determine the premium expense to be reported in the income statement and the estimated liability for premiums on the balance sheet for 2004 and 2005.

Explanation / Answer

Bags

Toy

Coupon

Estimated coupon redemption

2004

100000

12000

45000

27000

2005

120000

16000

60000

36000

Premium expense reported in income statement

2014 = (45000/3) * $1.50 = $22500

2015 = (60000/3) * $1.50 = $30000

Estimated liability

2014 = $13500

2015 = 18000