Question

Crispy Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 4 boxtops from Crispy Frosted Flakes boxes and $1. The company estimates that 60% of the boxtops will be redeemed. In 2014, the company sold 500,000 boxes of Frosted Flakes and customers redeemed 220,000 boxtops receiving 55,000 bowls. If the bowls cost Crispy Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2014?

Answer 1

Total Box tops sold	500000
Estimate of box tops to be sent in by customers	60%
I.e., 500000*60%	300000
Box tops already sent in	-220000
Estimate of box tops left to be received	80000
Number of Box tops needed per bowl	80000/4
Total bowls estimated to be sent to customers in future	20000
Cost of bowls to company was $3 and cash to be received from customer is $ 1
I.e., Net liability 2
Total premium liability to be recorded is 20,000*$ 2	$40,000