Question

Pronghorn Company 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 2017 and 2018 are as follows. (All purchases and sales are for cash.)

		2017		2018
MP3 codes purchased		280,000		369,600
Candy bars sold		3,158,600		2,890,500
Wrappers redeemed		1,344,000		1,680,000
2017 wrappers expected to be redeemed in 2018		324,800
2018 wrappers expected to be redeemed in 2019				392,000

Account Titles and Explanation Debit Credit 2017 Inventory of Premiums 686,000 Cash 686,000 (To record the premium inventory.) Cash 947,580 Sales Revenue (To record the sales.) Cash 947,580 591,360 Premium Expense 67,200 Inventory of Premiums (To record the expense associated with the sale.) Premium Expense 658,560 15,660 Premium Liability 15,660

Answer 1

Ans:

Premium expense for 2017:

Mp3(1,344,000/5)=268,800

Cost to purchase codes(268,800× $2.45)=$658,560

Distribution cost(268,800×.50=$134,400

Total cost=$792,960

Less cash received(268,800×$2.70)=(725,760)

Premium expense=$67,200

	Account titles and explanation	Debit	Credit
2017	Inventory of premium(280,000×$2.45)	$686,000
	Cash		$686,000
	(To record the premium inventory)
	Cash(3,158,600×$.30)	$947,580
	Sales revenue		$947,580
	(To record the sales)
	Cash(725,760-134,400)	$591,360
	Premium expense	$67,200
	Inventory of premium		$685,560
	(To record the expense associated with sale)
	Premium expense(324,800/5)×(2.45+.50-2.70)	$16,240
	Premium liability		$16,240
	(To record the premium liability)

Premium expense for 2018:

Mp3(1,680,000/5)=336,000

Cost to purchase codes(336,000× $2.45)=$823,200

Distribution cost(336,000×.50=$168,000

Total cost=$991,200

Less cash received(336,000×$2.70)=(907,200)

Premium expense=$84,000

	Account title and explanation	Debit $	Credit $
2018	Inventory of premium(369,600×$2.45)	$905,520
	Cash		$905,520
	(To record the premium inventory)
	Cash(2,890,500×$.30)	$867,150
	Sales revenue		$867,150
	(To record the sales)
	Cash(907.200-168,000)	$739,200
	Premium expense (84,000-16,240)	$67,760
	Premium Liability	$16,240
	Inventory of premium		$823,200
	(To record the expense associated with sale)
	Premium expense (392,000/5)×(2.45+.50-2.70)	$19,600
	Premium liability		$19,600
	(To record the premium liability)

Account	2017	2018	Classification
Inventory of Premiums	$27,440	$109,760	Inventory
Premium Liability	$16,240	$19,600	Current Liability
Premium Expense	$83,440	$87,360	Promotional/Selling expenses