Question

Pharoah 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): Coffee mugs purchased Candy bars sold Wrappers redeemed 2020 wrappers expected to be redeemed in 2021 2021 wrappers expected to be redeemed in 2022 2020 710,000 5,800,000 2,600,000 1,900,000 2021 810,000 6,820,000 4,210,000 2,690,000 Part 1 Prepare the general journal entries that should be made in 2020 and 2021 related to the above plan by Pharoah Candy. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Debit Credit Date Account Titles and Explanation 2020 (To record purchase of coffee mugs) 2020 (To record sale of candy bars) 2020 (To record coffee mugs offered for wrappers redeemed) 2020 (To record liability against expected redemption of wrappers)

Answer 1

Account Titles and Explanations	Debit	Credit
2020
Inventory of Premiums (710000 x $2.40)	1704000
Cash		1704000
(To record the premium inventory)
Cash (5800000 x $1.00)	5800000
Sales Revenue		5800000
(To record the sales)
Cash [2600000/10 = 260000 x ($2 - $1.60)]	104000
Premium Expense [260000 x ($2.40 + $1.60 - $2)]	520000
Inventory of Premiums (2600000/10 = 260000 x $2.40)		624000
(To record the expense associated with the sale)
Premium Expense	380000
Premium Liability [1900000/10 = 190000 x ($2.40 + $1.60 - $2)]		380000
(To record the premium liability)
2018
Inventory of Premiums   (810000 x $2.40)	1944000
Cash		1944000
(To record the premium inventory)
Cash (6820000 x $1.00)	6820000
Sales Revenue		6820000
(To record the sales)
Cash [4210000/10 = 421000 x ($2 - $1.60)]	168400
Premium Liability	380000
Premium Expense [421000 x ($2.40 + $1.60 - $2)] - $380000]	462000
Inventory of Premiums (4210000/10 = 421000 x $2.40)		1010400
(To record the expense associated with the sale)
Premium Expense	538000
Premium Liability [2690000/10 = 269000 x ($2.40 + $1.60 - $2)]		538000
(To record the premium liability)

Amount
Account	2017	2018	Classification
Inventory of Premiums	$1080000	$2012600	Inventory/Current asset
Premium Liability	$380000	$538000	Current Liability
Premium Expense	$900000	$1000000	Promotional/Selling expenses