Question

Kane 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 $1.80; in addition it costs $1.20 to mail each mug. The results of the premium plan for the years 2017 and 2018 are as follows (assume all purchases and sales are for cash): 2017 2018 Coffee mugs purchased 730,000 820,000 Candy bars sold 5,700,000 6,720,000 Wrappers redeemed 2,800,000 4,190,000 2017 wrappers expected to be redeemed in 2018 2,100,000 2018 wrappers expected to be redeemed in 2019 2,660,000 1-Prepare the general journal entries that should be made in 2017 and 2018 related to the above plan by Kane Candy. 2-Indicate the account names, amounts, and classifications of the items related to the premium plan that would appear on the Kane Candy Company balance sheet and income statement at the end of 2017 and 2018.

Answer 1

SOLUTION:

Particulars	Debit	Credit
Year-2017
Inventory of Premiums	1,314,000
Cash		1,314,000
(730,000 × $1.80 = $1,296,000
Cash	5,700,000
Sales Revenue		5,700,000
(5,700,000 * $1)
Cash [2,800,000/10 * ($2-$1.20)]	224,000
Premium Expense	280,000
Inventory of Premiums [280,000 * $1.80]		504,000
Premium Expense [2,100,000/10 * $1]	210,000
Premiums Liability		210,000
Year- 2018
Inventory of Premiums	1,476,000
Cash		1,476,000
(820,000 × $1.80 = $1,296,000
Cash	6,720,000
Sales Revenue		6,720,000
(6,720,000 * $1)
Cash [4,190,000 /10 * ($2-$1.20)]	335,200
Premium Liability	210,000
Premium Expense	209,000
Inventory of Premium [419,000*1.8]		754,200
Premium Expense	266,000
Premium Liability [2,660,000/10 * $1]		266,000

	2017	2018
Balance Sheet
Inventory of Premiums Current Asset	810,000	1,531,800
Premium Liability Current Liability	210,000	266,000
Income Statement
Premium ExpenseOperating Expense	490,000	475,000