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This posting addresses the liability for premiums.

Mott Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Mott $2.00 each. Mott estimates that 40% of the coupons will be redeemed. Data for 2010 and 2011 are as follows.

2010 2011
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

The estimated liability for premiums at December 31, 2011 is:
a) 11,250
b) 21,250
c) 22,500
d) 42,500

Solution Preview

Answer to your homework study question:

600,000 / 8 = 75000 * .40 = 30,000 * 2 = 60000

60000 - (150,000 / 8 * 2) = 60,000 - 37500
...

Solution Summary

The solution provides the exact calculations to determine the liability for premiums for Mott Co.

$2.19