Question

During 2017, General Mills Cereal Company included one coupon in each box of cereal, and sold 400,000 boxes. For every 10 coupons turned in by a customer with cash of $2, General Mills provided the customer a free silver spoon. The cost of the spoons was $5.00 each and postage of $.50. The company estimated 75% of the coupons would be redeemed. Actual spoons claimed were 28,000 (280,000 coupons submitted).

      Post activity to the t-accounts below and compute the account balances at December 31, 2017.

                                Product Premium                                        Product Premium

                        .           Liability                                                     Expense        .

Answer 1

Estimated amount of coupons to be redeemed = 400000*1*75% = 300000

Number of free silver spoons to be distributed = 300000 coupons / 10 coupons = 30000

Cost of spoons and postage = 5 + 0.50 = 5.50

Product Premium Liability = 30000*5.50 = 165000

Actual Product Premium Expense = 28000*5.50 = 154000

Journal entry for recording liability:

Product Premium Expense Dr 165000

Product Premium Liability Cr 165000

Journal entry for recording actual expense:

Product Premium Liability Dr 154000

Cash/Inventory Cr 154000

Balance as on December 31, 2017 in Product Premium Liability = 165000 - 154000 = 11000