Question

Problem 13-09 (Part Level Submission) Cheyenne offers an MP3 download (seven-single medley) as a premium for every 5 candy bar wrappers presented by customers together with $2.70. 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 $2.45. In addition, it costs 50 cents to distribute each code. The results of the premium plan for the years 2020 and 2021 are as follows. (All purchases and sales are for cash.) 2020 2021 MP3 codes purchased 369,600 280,000 Candy bars sold Wrappers redeemed 2020 wrappers expected to be redeemed in 2021 3,158,600 2,890,500 1,344,000 1,680,000 324,800 2021 wrappers expected to be redeemed in 2019 392,000 v (a) Prepare the journal entries that should be made in 2020 and 2021 to record the transactions related to the premium plan of the Cheyenne. (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 Credit Debit 2020 (To record the premium inventory.) (To record the sales.)

Answer 1

Solution:

First we computation of premium expenses:

	2020	2021
Wrappers redeemed (a)	1,344,000	1,680,000
MP3 codes redeemed (b = a/5)	268,800	336,000
Premium expenses (b × $2.45)	658,560	823,200
Add: distribution cost c (b × 0.5)	$134,400	$168,000
Total	$792,960	$991,200
Less: cash received d (b ×$2.70)	725,760	907,200
Less:Premium liability Premium expenses Net cash received (d - c) 2020 =591,360 (725,760 - 134,400) 2021 = 739,200(907,200 - 168,000)	67,200(792,960 -725760)	16,240 67,260 (991200 - 907200 - 16240)

Computation of premium liability
	2020	2021
Wrappers redeemed (a)	324,800	392,000
MP3 codes redeemed (b = a/5)	64,960	78,400
Premium expenses (b × $2.45)	159,152	192,080
Add: distribution cost cost (b × 0.5)	32,480	39,200
Total	191,632	231,280
Less: cash received d ( b × $2.70)	175,392	211,680
Premium expenses	16,240	19,600

a. Journal entries for 2020 & 2021

For 2020

No. Of event	Account title and Explanation	Debit ($)	Credit ($)
1.	Inventory premium (280,000 × $2.45)	686,000
	To cash		686,000
	(To record the premium inventory)
2.	Cash	947,580
	To sales revenue (3,158,600 ×0.30)		947,580
	(To record the sales)
3.	Cash (725,760 - 134,400)	591,360
	Premium expenses	67,200
	Inventory of premium		658560
	(To record the expenses associated with the sales)
4.	Premium expenses	16,240
	To premium liability)		16,240
	( To record the premium liability)

2021

No.of event	Account title and Explanation	Debit ($)	Credit ($)
1.	Inventory premium (369,600 ×$ 2.45)	905,520
	To cash		905,520
	(To record the premium inventory)
2.	Cash	867150
	To sales revenue (2,890,500 × 0.30)		867,150
	(To record the sales)
3.	Cash	792,960
	Premium liability	16,240
	premium expenses	67,260
	Inventory of premium		876,460
	(To record the expenses associated with the sale)
4.	Premium expenses	19,600
	Premium liability		19,600
	( To record premium liability)

Note : In 'computation of premium expenses'

	2020	2021
Premium expenses	67,200	67,260
Net cash received	591,360	739,200