Question

Exercise 13-12 Pronghorn Company includes 1 coupon in each box of soap powder that it packs, and 10 coupons are redeemable for a premium (a kitchen utensil). In 2017, Pronghorn Company purchased 9,400 premiums at 75 cents each and sold 113,000 boxes of soap powder at $3.40 per box; 47,600 coupons were presented for redemption in 2017. It is estimated that 60% of the coupons will eventually be presented for redemption. Prepare all the entries that would be made relative to sales of soap powder and to the premium plan in 2017. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Answer 1

Answer:

The journal entries are as follows:

(i) In 2017,

Inventory of premium A/c           Dr. $7,050

To cash                                                             $7,050

( To record purchase of 9,400 premiums at $0.75 cents each)

(ii) In 2017,

Cash A/c         Dr. $384,200

To sales revenue                   $384,200

(To record sale of 113,000 boxes at $3.40 per box)

(iii) In 2017,

Premium expenses A/c     Dr. $3,570

To Inventory of premiums [(47,600 × 10%) × 0.75]      $3,570

(To record premium redemption)

(iv) End of 2017,

Premium expenses A/c     Dr.  1,515

To premium liability                               1,515

(To record liability as note below)

Workings:

Total boxes sold = 113,000

Estimated redemption = 113,000 × 60%

                                      = 67,800

Less: Coupons already redeemed = 47,600

Premium liability of coupons = 20,200

cost of premium liability = (20,200 × 10%) × 0.75

                                        = 2,020 × 0.75

                                        = 1,515