Question

Victor Valentines offers a premium to its customers – glass rose vase (cost to Victor Valentines is $3 each) for the return of 10 labels. Each box of chocolates sold contains a label. The company estimates, based on past experience, that 65% of the labels will be redeemed. During 2018, one million boxes of chocolates were sold at $6 per box. During 2018, 350,000 labels were redeemed. Victor Valentines purchased 50,000 glass rose vases on January 1, 2018. Prepare the journal entries for the sale of the boxed chocolates, the purchase of the premiums, the estimated premium expense, and the redemption of the labels. (15 points)

Answer 1

In the books of Victor Valentines:

	Account Titles and Explanations	Debit	Credit
2018		$	$
a.	Cash ( 1,000,000 x $ 6)	6,000,000
	Sales		6,000,000
	To record sales revenue
b.	Premium Expense ( 1,000,000 / 10 x 65 % x $ 3 )	195,000
	Estimated Premium Liability		195,000
	To record estimated premium expense
c.	Inventory of Premiums ( 50,000 x $ 3 )	150,000
	Cash		150,000
	To record purchase of premiums
d.	Estimated Premium Liability ( 350,000 / 10 x $ 3 )	105,000
	Inventory of Premiums		105,000
	To record redemption of premiums