Question

Martinez Corporation sold Sugar Frosted Cocoa Bombs, a children's breakfast cereal. As a promotion, Martinez offered its customers a free music CD in exchange for 4 boxtops, plus $3.00 to cover postage and handling. The CD cost Martinez $3.25, and postage costs to mail the CDs out to customers were $2.50. Martinez estimated that 70% of its customers would redeem boxtops. Martinez purchased 11,000 CDs at the start of the promotion in November, 2020. 120,000 boxes of cereal were sold during November and December, 2020, and Martinez's year-end was December 31. Prior to the end of the fiscal year, 7,700 customers took advantage of the offer, which continued until February, 2021. Martinez follows ASPE and uses the expense approach to account for its premiums. ✓ Your answer is correct. Prepare the journal entry to record the purchase of the promotional CDs. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts.) Account Titles and Explanation Debit Credit Inventory of Premiums 35,750 Cash 35,750

Answer 1

The mistake in this part is,

You divided the total number of customers, i.e., 7700 with the no. of box tops to be exchanged, i.e., 4.

This makes no sense.

The question says, 7700 customers took advantage of the offer, which implies that each of the 7700 customers exchanged 4 boxtops and gave that extra $ 3.00.

Thus, the amounts are according to 7700 and not 7700/4 = 1925.

JOURNAL ENTRY:

Cash (7700*3)    23,100

Premium Expense 1,925

                              Inventory of Premium (7700*3.25)    25,025