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Premium Coupons

On 1/1/04, Company began including three coupons in each box of baseball food it sells. In exhange for 20 coupons and $10, customers will receive a porcelain baseball figurine. Each figurine costs Company $25. Company estimates that 20% of the coupons will not be redeemed. Events relating to the coupon promotion during 2004 and 2005 are as follows:

Year Boxes of baseball Porcelain figurines Actual # of coupons
cereal sold purchased redeemed
2004 200,000 25,000 420,000
2005 250,000 30,000 560,000

Compute the:
1) amount of premium expense FYE 12/31/04
2) amount of premium expense FYE 12/31/05
3) dollar balance of the premium inventory at 12/31/04
4) balance of estimated premium liability at 12/31/05
5) number of premiums (figurines) on hand at 12/31/05

CLUE must match: Estimated Premium Liability at 12/31/04 plus balance of Inventory figurines($) at 12/31/05 is $195,000

Here is what I have so far: Please assist--Something is wrong...
3 coupons = box cereal
20 coupons + $10 = 1 prize
1 prize = $25 (therefore Net cost = $25-$10=$15)
20% coupons NOT redeemed (therefore 80% redeemed)

sold 2004 200,000 boxes = 600,000 coupons (200,000*3)
x .80
480,000
480,000/20coupons = 24000 prizes x $15 net cost = $360,000 est prem exp 04

Actual Prem Exp = 420,000/20coupons=21000prizesx15net cost=315,000
Taking Actual prizes 21000- prizes purchased of 25000=4000 prizes left inventory
4000 remaining prizes in inventory x $25 actual cost = $100,000 Inv 2004

sold 2005 250,000 boxes = 750,000 coupons (250,00*3)
x .80
600,000
600,000/20coupons = 30,000 prizes x $15 net cost = $450,000 est prem exp 05

Actual Prem Exp = 560,000/20coupons=28000prizesx$15net cost=$420,000
Taking Actual prizes 28000-prizes purchased of 30000=2000prizes left inventory
2000 remaining prizes in inventory x $25 actual cost = $50,000 Inv 2005

Inventory 2004= 4000 x $25 = $100,000
Inventory 2005= 2000 x $25 = $ 50,000
Totals 6000 150,000

Clue states Inv at 12/31/05 and est Premium Liab 04 is $195,000 but I have inventory at 150,000 and est prem liab 04 at 360,000= 510,000---HELPP!!

Solution Preview

The estimated liability is what the total expense is estimated to be . In 2004, it is expected that a total of 480,000 coupons would be redeemed and the total cost ...

Solution Summary

The solution explains how to calculate the premium expense and liability when coupons are placed in products which can be redeemed for a gift

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