Question

P13-8 (L03) (Premium Entries) To stimulate the sales of its Alladin breakfast cereal, Loptien Company places 1 coupon in each box. Five coupons are redeemable for a premium consisting of a children's hand puppet. In 2018, the company purchases 40,000 puppets at $1.50 each and sells 480,000 boxes of Alladin at $3.75 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, 115,000 coupons are presented for redemption. 

Instructions 

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

Answer 1

Journal Entry:

Date	Account Name	Debit	Credit
1	Inventory of Premiums	$60,000
	To Cash		$60,000
	( to record puchase of 40,000 puppets @ $ 1.50)
2.	Cash	$1,800,000
	To Sales Revenue		$1,800,000
	( to record sale of 480,000 boxes @ $ 3.75 each)
3.	Premium Expense	$57,600
	To Premium Liability		$57,600
	(To record the expense associated with the sale.)
4.	Premium Liability	$34,500
	To inventory of premiums		$34,500
	(To record the premium liability.)

Explanation:

1) 40,000 × $ 1.50

= $60,000

2) 480,000 × $ 3.75

= $ 1,800,000

3) Premium Expense & Liability:

= 480,000 coupons × 40% redemption rate

= 192,000 coupons redeemed

=192,000 coupons ÷ 5 coupons per puppet

= 38,400 puppet × $ 1.50 per puppet

= $ 57,600

4) Premium Liability and Inventory:

115,000 coupons ÷ 5 coupons per puppet

= 23000 puppets × $ 1.5

= $ 34,500