Question

Oriole Co. includes one coupon in each bag of dog food it sells. In return for 4 coupons, customers receive a dog toy that the company purchases for $1.40 each. Oriole's experience indicates that 60 percent of the coupons will be redeemed. During 2015, 109,000 bags of dog food were sold, 13,330 toys were purchased, and 43,600 coupons were redeemed. During 2016, 129,000 bags of dog food were sold, 17,485 toys were purchased, and 64,500 coupons were redeemed.

Determine the premium expense to be reported in the income statement and the premium liability on the balance sheet for 2015 and 2016

Answer 1

Sol - The answer to the above problem is as follows -

2015

2016

Premium Expense $22,890 $27,090
Premium Liability $7,630 $12,145

Calculation is as Under -

2015

Premium Expense = (109,000 Bags of dog food sold / 4 Coupons) * 60% * $1.40

= $22,890

Premium Liability = $22,890 - ( 43,600 coupons / 4 coupons ) * $1.40

= $7,630

2016

Premium Expense = ( 129,000 bags of dog food / 4 Coupon ) * 60% * $1.40

= $27,090

Premium Liability = $27,090 + $7,630 - ( 64,500 coupons / 4 Coupons) * $1.40

= $12,145