Intermediate Accounting: Reporting And Analysis
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN: 9781337788281
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
Question
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Chapter 9, Problem 20E

1.

To determine

Prepare the journal entries in the books of Company TC for 2019.

1.

Expert Solution
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Explanation of Solution

Prepare the journal entry to record the purchase of the toy trucks:

DateAccount Titles and ExplanationsDebit ($)Credit ($)
2019Inventory of premiums300,000 
 Cash (240,000×$1.25) 300,000
 (To record the purchase of toy trucks)  

Table (1)

Prepare the journal entry to record the sales:

DateAccount Titles and Explanations

Debit

 ($)

Credit ($)
2019Cash or accounts receivable9,000,000 
 Sales (5,000,000×$1.80) 9,000,000
 (To record the sales)  

Table (2)

Prepare the journal entry to record the estimate of total premium liability:

DateAccount Titles and ExplanationsDebit ($)Credit ($)
2019Premium expenses (2)75,000 
         Estimated premium liability 75,000
 (To record the recognition of estimated premium liability)  

Table (3)

Working note (1):

Calculate the total box tops estimated for redemption:

ParticularsAmount ($)Amount ($)
Total box tops outstanding in 2019 (A)5,000,000 
Estimated percent redeemed (B)60% 
Total coupons estimated for redemption (C) (A×B) $3,000,000

Table (4)

Working note (2):

Calculate the amount of premium expenses:

Premium expense = [Total coupons estimated for redemptionOffer of a toy truck upon return of 10 coupons×(Cost of a toy truckCollection of cashfrom customers on redemption of 10 coupons)]=3,000,000coupons10×($1.25$1.00)=$75,000

Prepare the journal entry to record the redemption of 2,200,000 coupons in 2019:

DateAccount Titles and ExplanationsDebit ($)Credit ($)
2019Cash (2,200,00010×$1)220,000 
 Estimated premium liability (2,200,00010×$0.25)55,000 
     Inventory of premiums     (2,200,00010×$1.25) 275,000
 (To record the redemption of 2,200,000 coupons)  

Table (5)

2.

To determine

Identify the manner in which the items related to premium plan would be reported in the balance sheet as of December 31, 2019.

2.

Expert Solution
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Explanation of Solution

Balance sheet: Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the partial balance sheet as of December 31, 2019.

Company TC
Balance Sheet Statement (Partial)
As at December 31, 2019
AssetsAmount
Current assets: 
Inventory of premiums (3)$25,000
 
LiabilitiesAmount
Current liabilities: 
Estimated premium liability (4)$20,000

Table (6)

Working note (3):

Determine the amount of inventory premium as at December 31, 2019.

Inventory of premiumat December 31, 2019}[Increase (debit) in inventory of premium in 2019 Decrease (credit) in inventory of premium in 2019 ]=$300,000$275,000=$25,000

Working note (4):

Determine the amount of estimated premium liability as at December 31, 2019.

Estimated premium liabilityat December 31, 2019}[Increase (credit) in estimatedpremium liability in 2019 Decrease (debit) in estimatedpremium liability in 2019 ]=$75,000$55,000=$20,000

3.

To determine

Explain the effects on the financial statements if Company TC recorded the premium expense as the coupons were redeemed.

3.

Expert Solution
Check Mark

Explanation of Solution

Effects on the financial statements:

The premium was offered by Company TC to increase the sales and the redemption of coupons is probable and that can be reasonably estimated. Thus, Company TC must record the estimate as an expense and the related liability during the sales period. If the estimate is not made, then the expenses will not match properly against the sales premium. As an effect of this Company TC’s expense would be understated by $20,000. In addition to this, Company TC’s liability will not properly reflect the probable obligation of the company. Thus, Company TC’s liability will be understated by $20,000.

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Chapter 9 Solutions

Intermediate Accounting: Reporting And Analysis

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Intermediate Accounting: Reporting And Analysis
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ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:Cengage Learning