Question

# Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3...

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?

 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

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