Question

Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Palmer Frosted Flakes boxes. The company estimates that 60% of the boxtops will be redeemed. In 20x4, 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 reported at the end of 20x4?

Answers:	a. $270,000
	b. $50,000
	c. $138,000
	d. $75,000

Answer 1

Answer is (b) $50,000.

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