Question

The Happy Cereal Company includes a premium in each box of its cereal. For four premiums plus $2.00, customers are entitled to a plastic wiggle worm that costs Happy $4.50 each. Happy expects 60% of the premiums to be redeemed. In 2016, Happy sold 500,000 boxes of cereal and distributed 25,000 wiggle worms.

Refer to Exhibit 9-1. What is Happy's estimated liability for unredeemed premiums on December 31, 2016?

the answer is 125,000 I just need help figuring out how to get it

John Company includes three coupons in each package of cookies it sells. In exchange for 20 coupons, a customer will receive a cookie sheet. John estimates that 30% of the coupons will be redeemed. In 2016, John sold 4,000,000 boxes of cookies and purchased 150,000 Cookie sheets at $2.50 each. During the year, 970,000 coupons were redeemed.

Refer to Exhibit 9-3. What amount should John report as estimated premium claims outstanding at December 31, 2016? Answer is 328,750 need to know how to get it

Answer 1

1. Estimated liability for unredeemed premiums

((Total Sales * Expected %) - Premium redeemed) * Net Cost of wiggle worm/4

((500000 * 60%) - 100000) * $2.50/4

(300000 - 100000) * $2.50/4

200000 * 2.5 / 4

$125000

2. estimated premium claims outstanding

(((Sales * Coupons per sale * Expected %) - Coupons Redeemed) / Coupons for redemption)) * Cost of Cookie Sheet

(((4000000 * 3 * 30%) - 970000) / 20)) * $2.5

((3600000 - 970000) / 20)) * $2.5

(2630000 / 20)) * $2.5

$328750