Question

Thermal Cereal is offering a promotion where 4 cereal box tops and $2 gets a customer a superhero cape. The company purchases 24,000 promotional capes for $8 each and estimates that 40% of box tops will be redeemed for the promotion. If customers purchase 72,000 boxes of cereal at $4.50 each and 22,000 box tops are redeemed in 20X1, how much premium liability will be recorded in the December 31, 20X1 adjusting entry?

Answer 1

Total boxes sold	72000	Boxes
Expected redemption	28800	Boxes
Alreaady redeemed	22000	Boxes
To be redeemed in next year	6800	Boxed
Capes required	1700
Cost per cape	$8
Less: Amount received	$2
Net	$6
Net liability at the end	$10,200
Total expense for the year	43200	(28800/4*$6)
Adjusting Entry
	Debit	Credit
Premium Expense	$43,200
Capes purchases( stores)		$33,000	(22000/4*6)
Premium Liability		$10,200