Question

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 $6.00 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 $2.50/poster and 20,000 CDs at $7.50/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    

1. To record coupons redeemed

——————————————————————————————————————————

2. To record estimated liability

Answer 1

		Period 1		Period 2
	Entry	Debit	Credit	Debit	Credit
a.	Cash [420000/100 = 4200 x $6]; [750000/100 = 7500 x $6]	25200		45000
	Premium liability			11200
	Premium Expense [4200 x ($2.50 + $7.50 - $6.00)];[(7500 - 2800) x ($2.50 + $7.50 - $6.00)]	16800		18800
	Inventory of Premiums [4200 x ($2.50 + $7.50)];[7500 x ($2.50 + $7.50)]		42000		75000
	(To record coupons redeemed)
b.	Premium Expense	11200		8080
	Premium liability		11200		8080
	(To record estimated liability)

Working:

Period 1:

Number of coupons expected to be redeemed = $700000/100 = 7000 x 80% = 5600

Actually redeemed = 4200

Premium liability = [(7000 - 4200) x ($2.50 + $7.50 - $6.00)] = 2800 x $4 = $11200

Period 2:

Number of coupons expected to be redeemed = $840000/100 = 8400 x 80% = 6720

Actually redeemed = 7500

Premium liability = [(2800 + 6720 - 7500) x ($2.50 + $7.50 - $6.00)] = 2020 x $4 = $8080