Question

Wildhorse Candy Company offers a coffee mug as a premium for every ten $1 candy bar wrappers presented by customers together with $2. The purchase price of each mug to the company is $2.40; in addition it costs $1.60 to mail each mug. The results of the premium plan for the years 2020 and 2021 are as follows (assume all purchases and sales are for cash): 2020 2021 Coffee mugs purchased 750,000 780,000 Candy bars sold 5,500,000 6,690,000 Wrappers redeemed 2,600,000 4,230,000 2020 wrappers expected to be redeemed in 2021 2,000,000 2021 wrappers expected to be redeemed in 2022 2,710,000

Prepare the general journal entries that should be made in 2020 and 2021 related to the above plan by Wildhorse Candy. Indicate the account names, amounts, and classifications of the items related to the premium plan that would appear on the Wildhorse Candy Company balance sheet and income statement at the end of 2020 and 2021. Balance Sheet Account Name Class 2020 2021 Operating IncomeCurrent LiabilityOperating ExpenseCurrent Asset $ $ Operating IncomeCurrent AssetCurrent LiabilityOperating Expense $ $ Income Statement Account Name Class 2020 2021     Operating Expense    Operating Income    Current Asset    Current Liability     $ $

Answer 1

1.

No.	General Journal	Debit	Credit
2020
1	Inventory of Premiums (750000 x $2.40)	1800000
	Cash		1800000
	(To record the purchase of premium inventory)
2	Cash	5500000
	Sales Revenue (5500000 x $1)		5500000
	(To record the sales)
3	Cash [2600000/10 = 260000 x ($2.00 - $1.60)]	104000
	Premium Expense [260000 x ($2.40 + $1.60 - $2.00)]	520000
	Inventory of Premiums (260000 x $2.40)		624000
	(To record the wrappers redeemed)
4	Premium Expense	400000
	Premium Liability [2000000/10 = 200000 x ($2.40 + $1.60 - $2.00)]		400000
	(To record the premium liability)
2021
1	Inventory of Premiums (780000 x $2.40)	1872000
	Cash		1872000
	(To record the purchase of premium inventory)
2	Cash	6690000
	Sales Revenue (6690000 x $1)		6690000
	(To record the sales)
3	Cash [4230000/10 = 423000 x ($2.00 - $1.60)]	169200
	Premium Liability	400000
	Premium Expense [(423000 - 200000) x ($2.40 + $1.60 - $2.00)]	446000
	Inventory of Premiums (423000 x $2.40)		1015200
	(To record the wrappers redeemed)
4	Premium Expense	542000
	Premium Liability [2710000/10 = 271000 x ($2.40 + $1.60 - $2.00)]		542000
	(To record the premium liability)

2.

Balance Sheet
Account Name	Class	2020	2021
Inventory of Premiums	Current Asset	$       1,176,000	$       2,032,800
Premium Liability	Current Liability	$         400,000	$         542,000
Income Statement
Account Name	Class	2020	2021
Premium Expense	Operating Expense	$         920,000	$         988,000