Question

Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Palmer Frosted Flakes boxes and $1. The company estimates that 60% of the boxtops will be redeemed. In 2012, the company sold 675,000 boxes of Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls. If the bowls cost Palmer Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2012?

Answer 1

Answer is $50,000.

Total Box tops sold	675000
Estimate of box tops to be sent in by customers	60%
I.e., 675000*60%	405000
Box tops already sent in	-330000
Estimate of box tops left to be received	75000
Number of Box tops needed per bowl	75000/3
Total bowls estimated to be sent to customers in future	25000
Cost of bowls to company was $3 and cash to be received from customer is $ 1
I.e., Net liability 2
Therefore, Total premium liability to be recorded is 25,000*$ 2	$50,000