Copyright

Stuttgart Manufacturing Company requires 10 coupons from its soap powder, Uberschocken, to be...

Question:

Stuttgart Manufacturing Company requires 10 coupons from its soap powder, Uberschocken, to be redeemed along with $1.00 for a stain remover sprayer. Each box contains one coupon. This year 1,000,000 boxes of soap powder were sold at $5.25 per box, again each containing a coupon. They purchased 75,000 stain sprayers for cash at $2.10 each during the current year. They estimate that 70% of the coupons will be returned from sales this year. Only 550,000 coupons actually were returned in the current year.

A. Record the purchase of the stain sprayers assuming cash was paid.

B. Calculate the premium expense for the current year.

C. Record the entire premium expense for the year, both redemption and accrual.

Coupons and Premiums

Coupons are a piece of paper attached in the product package in order to use for redeeming certain freebies from the seller. On the other hand, a premium is an item that is ready to be given away to customers in order to entice them to buy more product. Due to the rise of this kind of promotion and the outcome of the transaction is high, IFRS guides us in the contingent liability. A contingent liability is an obligation arising from an event in which the outcome is uncertain or unknown. However; if the outcome has a high chance of an obligation, we will record in the books for the liability incurred.

Answer and Explanation:

A. Record the purchase of the stain sprayers assuming cash was paid.

Account Debit Credit
Premium Inventory (75,000 x $2.10) 157,500
Cash 157,500

B. Calculate the premium expense for the current year.

To get the premium expense for the 550,000 coupons redeemed at the current year:

550,000 coupons / 10 coupons per premium = 55,000 premiums given away

55,000 x $2.10 cost of the premium = 115,500

Account Debit Credit
Premium Expense (55,000 x $2.10) 115,500
Premium Inventory 115,500

C. Record the entire premium expense for the year, both redemption and accrual.

Assuming that Stuttgart will be able to redeem only 70% of the total coupons, we will accrue the remaining premium for the year. The accrual is the proper way of recognizing estimated regardless of the premiums will be eventually redeemed or not.

1,000,000 boxes x 70% = 700,000 coupons

700,000 / 10 coupons per premium = 70,000 premiums for redemption

70,000 - 55,000 = 15,000 premiums left for redemption

15,000 premiums will accrue for the year.

Account Debit Credit
Premium Expense (15,000 x $2.10) 31,500
Premium Liability 31,500

Learn more about this topic:

Loading...
Contingent Liabilities: Definition & Examples

from Accounting 101: Financial Accounting

Chapter 10 / Lesson 4
19K

Related to this Question

Explore our homework questions and answers library