Question

Premiums. 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 20000 CDs at 7.50 dollars per cd. Prepare journal entries for period 1 and period 2. Record entry for coupons redeemed and estimated liability

Answer 1

(1)

	period 1	period 2
estimated liability for premiums		5600   debit
premium expense	16800 DEBIT	24400 debit [5600+45000-75000]
cash	25200 DEBIT	45000 debit
inventory of posters and CD	42000 CREDIT	75000 credit
number of coupons redeemed	420000 sales/100coupons = 4200	750000/100=7500
cash received	4200*6=25200	7500*6 = 45000
cost per coupon [2.5+7.5]	10$	10$
inventory of CD and poster reduced	2.5*4200=10500 7.5*4200=31500	7500*10=75000
Premium expense will be difference between cost of CD AND POSTER and cash recovered from cusomer [ 10$ -6$] = 4$	4200coupons redeemed *4$= 16800	7500*4=30000

(2)

	1	2
premium expense	5600 debit	2480 debit
estimated liability for premiums	5600 credit	2480 credit
estimated liability for coupons not redeemed = [(700000*80%)-420000 coupons rdeemed]/100coupons *4$ cost of redemption	5600$
840000*80%= 672000 for period 2
coupons redeemed in period 2 - coupons of period 1 redeemed in period 2 =750000- [560000-420000] =610000$ of sales were redeemed for period 2 coupons for period 2 not redeemed= estimated coupon redemption - actual redemption = 672000-610000 =62000 liability = 62000/100 * 4$ =2480$