Question Details

Muggs Co. includes one coupon in each bag of dog food 


1.	During 2013, Salton Co. introduced a new line of machines that carry a three-year warranty against manufacturer- defects. Based on industry experience, warranty costs are estimated at 1% of sales in the year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: (assume the accrual method)
		Sales		Actual Warranty Expenditures
2013	$   1,400,000	$    26,000
2014	1,000,000	40,000
2015	  1,400,000	    90,000
	$3,800,000	$156,000
		What amount should Salton report as a liability at December 31, 2015?
a.	$0
b.	$14,000
c.	$22,000
d.	$148,000

	2.	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?
a.	$150,000
b.	$40,000
c.	$60,000
d.	$84,000

Use the following information for questions 3, 4, and 5.
Muggs Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Muggs $3 each. Muggs estimates that 45 percent of the coupons will be redeemed.  Data for 2014 and 2015 are as follows:
		   2014		   2015	
Bags of dog food sold	500,000	600,000
Leashes purchased	18,000	22,000
Coupons redeemed	120,000	150,000

	3.	The premium expense for 2014 is 
a.	$187,500.
b.	$45,000.
c.	$75,000.
d.	$84,375.

	4.	The premium liability at December 31, 2014 is
a.	$37,500.
b.	$54,000.
c.	$45,000.
d.	$39,375.

	5.	The premium liability at December 31, 2015 is
a.	$22,500.
b.	$39,375.
c.	$45,000.
d.	$84,375.



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