Intermediate Accounting 2 - Chapter 2 Premium Liability PDF

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PREMIUM LIABILITY Illustrative 1 During the current year, Pepper Company sold 500,000 boxes of cake mix under a new sales promotional program. Each box contained one coupon, which entitled the customer to a baking pan upon remittance of P40. The entity paid P50 per pan and P5 for handling and shipping and estimated that 80% of the coupons would be redeemed, even though only 300,000 coupons had been processed during the year 1. What is the premium expense for the current year? a. 6,000,000 c. 4,500,000 b. 7,500,000 d. 2,000,000 Sales in units * expectations # of coupons / # of coup. Req. # of premiums to be dist.

500,000 80% 400,000 1 400,000

Cost of premiums Other costs Remittance Prem exp/unit

50 5 (40) 15

Premium expense: 400,000 * 15 = 6,000,000 2. What amount should be reported as liability for unredeemed coupons at yearend? a. 1,000,000 c. 3,000,000 b. 1,500,000 d. 5,000,000 Est Prem, beg Prem. Expense Premium dist. ((300k/1)*15)) Est. Prem liab, end

0 6,000,000 4,500,000 1,500,000...