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    ACC211 Review-Material Premium

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    Lexter Dave C Estoque
    Pryor Frosted Flakes Company offered a cereal bowl premium for boxtops redeemed from cereal boxes in 2007. The company sold 500,000 boxes and customers redeemed 220,000 boxtops to receive 55,000 bowls. The bowls cost $2.50 each. To calculate the liability for outstanding premiums, the number of expected redemptions is calculated based on sales and redemption rate, then multiplied by the cost per bowl. The liability is $30,000.

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    ACC211 Review-Material Premium

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    Lexter Dave C Estoque
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    Pryor Frosted Flakes Company offered a cereal bowl premium for boxtops redeemed from cereal boxes in 2007. The company sold 500,000 boxes and customers redeemed 220,000 boxtops to receive 55,000 bowls. The bowls cost $2.50 each. To calculate the liability for outstanding premiums, the number of expected redemptions is calculated based on sales and redemption rate, then multiplied by the cost per bowl. The liability is $30,000.

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    Pryor Frosted Flakes Company offered a cereal bowl premium for boxtops redeemed from cereal boxes in 2007. The company sold 500,000 boxes and customers redeemed 220,000 boxtops to receive 55,000 bowls. The bowls cost $2.50 each. To calculate the liability for outstanding premiums, the number of expected redemptions is calculated based on sales and redemption rate, then multiplied by the cost per bowl. The liability is $30,000.

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    ACC211 Review-Material Premium

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    Lexter Dave C Estoque
    Pryor Frosted Flakes Company offered a cereal bowl premium for boxtops redeemed from cereal boxes in 2007. The company sold 500,000 boxes and customers redeemed 220,000 boxtops to receive 55,000 bowls. The bowls cost $2.50 each. To calculate the liability for outstanding premiums, the number of expected redemptions is calculated based on sales and redemption rate, then multiplied by the cost per bowl. The liability is $30,000.

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    ACC211_REVIEW MATERIAL_PREMIUM LIABILITY_1_cain

    1. Pryor Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 4 boxtops from Pryor
    Frosted Flakes boxes and $1.00. The company estimates that 60% of the boxtops will be redeemed. In 2007,
    the company sold 500,000 boxes of Frosted Flakes and customers redeemed 220,000 boxtops receiving
    55,000 bowls. If the bowls cost Pryor Company $2.50 each, how much liability for outstanding premiums
    should be recorded at the end of 2007?
    a. $20,000
    b. $30,000
    c. $50,000
    d. $70,000

    Use the following information for questions 2, 3, and 4.


    Kent Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash.
    The leashes cost Kent $2.00 each. Kent estimates that 40 percent of the coupons will be redeemed. Data for 2006
    and 2007 are as follows:
    2006 2007
    Bags of dog food sold 500,000 600,000
    Leashes purchased 18,000 22,000
    Coupons redeemed 120,000 150,000

    2. The premium expense for 2006 is


    a. $25,000.
    b. $30,000.
    c. $35,000.
    d. $50,000.

    3. The estimated liability for premiums at December 31, 2006 is


    a. $7,500.
    b. $10,000.
    c. $17,500.
    d. $20,000.

    4. The estimated liability for premiums at December 31, 2007 is


    a. $11,250.
    b. $21,250.
    c. $22,500.
    d. $42,500.

    SOLUTIONS
    1. b {[(500,000 × .60) – 220,000] ÷ 4} × $1.50 = $30,000.

    2. d [(500,000 × .4) ÷ 8] × $2 = $50,000.

    3. d [(200,000 – 120,000) ÷ 8] × $2 = $20,000.

    4. d {[(600,000 × .4) – 150,000] ÷ 8} × $2 = $22,500.


    $22,500 + $20,000 = $42,500.

    5. In an effort to increase sales, Blue Razor Blade Company inaugurated a sales promotion campaign on June 30,
    2005, whereby Blue placed a coupon in each package of razor blades sold, the coupons being redeemable for a
    premium. Each premium costs Blue $.50, and five coupons must be presented by a customer to receive a premium.
    Blue estimated that only 60 percent of the coupons issued will be redeemed. For the six months ended December
    31, 2005, the following information is available:

    Page 1 of 2
    ACC211_REVIEW MATERIAL_PREMIUM LIABILITY_1_cain

    Packages of razor blades sold ......................... 400,000


    Premiums purchased .................................... 30,000
    Coupons redeemed ...................................... 100,000

    What is the estimated liability for premium claims outstanding at December 31, 2005?
    a. $10,000
    b. $14,000
    c. $18,000
    d. $24,000

    ANS: B OBJ: LO 1

    6. In an effort to increase sales, Rofix Company began a sales promotion campaign on June 30, 2005. Part of this
    promotion included placing a special coupon in each package of candy bars sold. Customers were able to redeem ten
    coupons for a Frisbee. Each premium costs Rofix $1.50. Rofix estimated that 60 percent of the coupons issued will be
    redeemed. For the six months ended December 31, 2005, the following information is available:

    Packages of candy bars sold ........................... 3,200,000


    Premiums purchased .................................... 172,000
    Coupons redeemed ...................................... 1,425,000

    What is the estimated liability for premium claims outstanding at December 31, 2005?

    ANS:

    Number of coupons issued .............................. 3,200,000


    Expected participation rate ...........................  60%
    Expected coupon redemptions ........................... 1,920,000
     10%
    Estimated total premiums .............................. 192,000
    Number redeemed to date (1,425,000 coupons  10%) ..... - 142,500
    Expected remaining premiums ........................... 49,500
    49,500 premiums @ $1.50 each = ........................ $ 74,250

    OBJ: LO 2

    “Don’t panic. I’m with you. There’s no need to fear for I’m your God. I’ll give you strength. I’ll help you. I, your
    God, have a firm grip on you and I’m not letting go.”
    - Isaiah 41:10,13

    Page 2 of 2

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