Sun Shack Snack Corp. sells T rail mix for $7.50 a box. By including a coupon fo
ID: 2606985 • Letter: S
Question
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.Explanation / Answer
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
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