Answer:
premium liability (coupon oustanding) $ 1,500
Explanation:
We will recognize a liablity based on expected coupon redemption of 10%:
Sold 1,000,000 deluxe snack = 1,000,000 coupon
from this we expect 10% will be redeem: 1,000,000 x 10% = 100,000
Then, calculate the cost that this coupon will generate:
Thre will be 100,000 redeem coupons which, every 10 is traded for a 1.50 silver chip clip:
100,000 / 10 x $ 1.50 = $ 15,000
For the sales of we have a premium liablity of 15,000
premium expense 15,000
premium liaiblity 15,000
<u>We also purchase this silver chip clip:</u>
Premium Inventory 15,000
Cash 15,000
During the year, we adjust for the chips clips distributed:
9,000 x $ 1.50 = 13,500
This decreases both, the liablity and the premium inventory.
Premium Liability 13,500 debit
Premium Inventory 13,500 credit
Adjusted year-end balance:
15,000 - 13,500 = 1,500
