Question

Vaughn Company offers an MP3 download (seven-single medley) as a premium for every 6 candy bar wrappers presented by customers together with $2.80. 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 $2.55. 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		390,000		514,800
Candy bars sold		2,809,900		2,574,700
Wrappers redeemed		1,872,000		2,340,000
2017 wrappers expected to be redeemed in 2018		452,400
2018 wrappers expected to be redeemed in 2019				546,000

Part 1

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Prepare the journal entries that should be made in 2017 and 2018 to record the transactions related to the premium plan of the Vaughn Company. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 1,525.)

Account Titles and Explanation	Debit	Credit
2017
(To record the premium inventory.)
(To record the sales.)
(To record the expense associated with the sale.)
(To record the premium liability.)
2018
(To record the premium inventory.)
(To record the sales.)
(To record the expense associated with the sale.)
(To record the premium liability.)

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List of Accounts

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Part 2

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		$		$		Long-term InvestmentsCurrent AssetProperty, Plant and EquipmentSelling ExpenseStockholders' EquityCurrent Liability
Premium Liability						Stockholders' EquityCurrent LiabilityCurrent AssetProperty, Plant and EquipmentSelling ExpenseLong-term Investments
Premium Expense						Property, Plant and EquipmentCurrent AssetSelling ExpenseCurrent LiabilityLong-term InvestmentsStockholders' Equity

Answer 1

Debit Credit Date Particulars 2017 2017 Inventory of premium Cash (To record the pemium inventory.) (W.N 1) 994,500 994,500 842,970 2017 Cash Sales Revenue (To record the sales.) (W.N 2) 842,970 717,600 78,000 2017 Cash Premium expense inventory of premium (To record the expense associated with the sale.) (W.N 3 & 4) 795,600 18,850 2017 Premium expense Premium liability (To record the premium liability.) (W.N5) 18,850

1,312,740 2018 2018 Inventory of premium Cash (To record the pemium inventory.) (W.N 1) 1,312,740 772,410 2018 Cash Sales Revenue (To record the sales.) (W.N 2) 772,410 2018 Cash Premium expense Premium Liabilty inventory of premium (To record the expense associated with the sale.) (W.N 3 & 4) 897,000 78,650 18,850 994,500 22,750 2018 Premium expense Premium liability (To record the premium liability.) (W.N 5) 22,750 Account Inventory of Premiums Premium Liability Premium Expenses 2017 198,900 18,850 96,850 2018 Classification 517,140 Current Assets 22,750 Current Liabilty 101,400 Selling Expense

Working Notes: 1) Inventory Purchased MP3 codes purchased (a) Purchase cost (b) Total Price paid for Inventory of premium (a xb) 2017 390,000 2.55 994,500 2018 514,800 2.55 1,312,740 $ $ $ 2) Candy Bar sold (a) Price at which candy bar sold to distributors (b) Total Cash Received (axb) 2,809,900 0.30 842,970 $ $ 2,574,700 0.30 772,410 $ 3) Total Wrappers Redeemed (a) Number of Candy Bar wrappers presented by customer (b) Total Candy Bar Wrappers redeemed (a/b) (c) Candy Bar Purchase price (cx 2.55) Postage cost (Cx0.50) Total Cost Paid (d) Cash Received from Customer (cx 2.80) (e) Premium Expense (d-e) Less: Outstanding claims at Previous year but redmeed at current year Premium Expense charge to current year 1,872,000 2,340,000 66 312,000 390,000 795,600 $ 994,500 156,000 195,000 951,600 1,189,500 873,600 1,092,000 78,000 97,500 (18,850) 78,000 $ 78,650 14) Cash Received from Customer from sales Less: Postage Expenses Net Cash Received from Customer 873,600 $ (156,000) 717,600 $ 1,092,000 (195,000) 897,000

452,400 546,000 5) Premium Expenses liability Wrappers excepted to be redeem in next year (a) Number of Candy Bar wrappers presented by customer (b) Total Candy Bar excepted to be redeem (a/b) (c) Candy Bar Purchase price (cx 2.55) Postage cost (Cx 0.50) Total Cost Paid (d) Cash Received from Customer (cx 2.80) (e) Premium Expense (d-e) 75,400 192,270 37,700 229,970 211,120 18,850 91,000 232,050 45,500 277,550 254,800 22,750 $ 2017 6) Inventory Premium Balance Inventory of Premium Balance Opening Balance Add: Purhcases Less: Sales Closing Balance 994,500 (795,600) 198,900 2018 198,900 1,312,740 (994,500) 517,140