Question

Pronghorn Company offers an MP3 download (seven-single medley) as a premium for every 6 candy bar wrappers presented by customers together with $3.40. The candy bars are sold by the company to distributors for 30 cents each. The purchase price of each download code to the company is $3.15. In addition, it costs 50 cents to distribute each code. The results of the premium plan for the years 2017 and 2018 are as follows. (All purchases and sales are for cash.)

		2017		2018
MP3 codes purchased		345,000		455,400
Candy bars sold		2,998,000		2,809,300
Wrappers redeemed		1,656,000		2,070,000
2017 wrappers expected to be redeemed in 2018		400,200
2018 wrappers expected to be redeemed in 2019				483,000

a) Prepare the journal entries that should be made in 2017 and 2018 to record the transactions related to the premium plan of the Pronghorn Company.

b) Indicate the amounts for each accounts, and classifications of the items related to the premium plan that would appear on the balance sheet and the income statement at the end of 2017 and 2018.

		Amount
Account		2017		2018		Classification
Inventory of Premiums		$
Premium Liability
Premium Expense

Answer 1

a)

No.	General Journal	Debit	Credit
2017
1	Inventory of Premiums (345000 x $3.15)	1086750
	Cash		1086750
	(To record the purchase of premium inventory)
2	Cash	899400
	Sales Revenue (2998000 x $0.30)		899400
	(To record the sales)
3	Cash [1656000/6 = 276000 x ($3.40 - $0.50)]	800400
	Premium Expense [276000 x ($3.15 + $0.50 - $3.40)]	69000
	Inventory of Premiums (276000 x $3.15)		869400
	(To record the wrappers redeemed)
4	Premium Expense	16675
	Premium Liability [400200/6 = 66700 x ($3.15 + $0.50 - $3.40)]		16675
	(To record the premium liability)
2018
1	Inventory of Premiums (455400 x $3.15)	1434510
	Cash		1434510
	(To record the purchase of premium inventory)
2	Cash	842790
	Sales Revenue (2809300 x $0.30)		842790
	(To record the sales)
3	Cash [2070000/6 = 345000 x ($3.40 - $0.50)]	1000500
	Premium Liability	16675
	Premium Expense [(345000 - 66700) x ($3.15 + $0.50 - $3.40)]	69575
	Inventory of Premiums (345000 x $3.15)		1086750
	(To record the wrappers redeemed)
4	Premium Expense	20125
	Premium Liability [483000/6 = 80500 x ($3.15 + $0.50 - $3.40)]		20125
	(To record the premium liability)

b)

Account	Classification	Amount
		2017	2018
Inventory of Premiums	Balance Sheet - Current Asset	217350	565110
Premium Liability	Balance Sheet - Current Liability	16675	20125
Premium Expense	Income Statement - Selling Expenses	85675	89700