Question Details

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



1
Irwin Music Shop gives its customers coupons redeemable for a poster plus a Bo Diddley CD. One coupon is issued for each dollar of sales. On the surrender of 100 coupons and $5.00 cash, the poster and CD are given to the customer.  It is estimated that 80% of the coupons will be presented for redemption. Sales for the first period were $700,000, and the coupons redeemed totaled 420,000. Sales for the second period were $840,000, and the coupons redeemed totaled 750,000. Irwin Music Shop bought 20,000 posters at $2.00/poster and 20,000 CDs at $6.00/CD.

Instructions
Prepare the following entries for the two periods, assuming all the coupons expected to be redeemed from the first period were redeemed by the end of the second period.


	Entry	Period 1	Period 2	
(a) To record coupons redeemed
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(b) To record estimated liability
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2
Sterling Co. includes one coupon in each bag of dog food it sells. In return for 4 coupons, customers receive a dog toy that the company purchases for $1.50 each. Sterling's experience indicates that 60 percent of the coupons will be redeemed. During 2014, 100,000 bags of dog food were sold, 12,000 toys were purchased, and 40,000 coupons were redeemed. During 2015, 120,000 bags of dog food were sold, 16,000 toys were purchased, and 60,000 coupons were redeemed.

Instructions
Determine the premium expense to be reported in the income statement and the premium liability on the balance sheet for 2014 and 2015.




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