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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

\$2.19