Question

126. 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 2021, the company sold 800,000 boxes of Frosted Flakes and customers redeemed 352,000 boxtops receiving 88,000 bowls. If the bowls cost Crispy Company $2 each, how much liability for outstanding premiums should be recorded at the end of 2021?

Answer 1

Answer:

$32,000

Explanation:

Expected boxtops to redeemed = 800,000 × 60% = 480,000

Already redeemed boxtops = 352,000

Outstanding boxtops to be redeemed = 480,000 – 352,000 = 128,000

Outstanding bows to offer = 128,000/4 = 32,000

Cost of outstanding bows to offer = 32,000 × $2 = $64,000

Outstanding liability = Cost of outstanding bows to offer – Amount sent with boxtops

Outstanding liability = $64,000 – ($1 × 32,000) = $32,000

Therefore, the liability for outstanding premiums should be recorded at the end of 2021 is $32,000.