Question

Marine City Company sells bags of coffee. Each bag includes one coupon; five coupons (plus $3.00) are redeemable for a personalized coffee mug. In 2023, Marine City purchased 9,000 mugs at $4.20 each and sold 60,000 bags of coffee that year at $6.00 per bag. Marine City estimated that 50% of the coupons would be redeemed. Actual coupons redeemed were 8,000 in 2023 and 13,000 in 2024. The estimated liability for outstanding premiums on the 12/31/23 balance sheet is:

Answer 1

Answer:

$5,280

Explanation:

Coupon expected to be redeemed = 60000 bags * 0.50 = 30,000

Number of coffee mugs to be obtained against coupons = 30,000 / 5 = 6,000

Bags actually redeemed against coupons = 8000/5 = 1,600

Cash cost to the company = Cost of mug - Cash to be paid

Cash cost to the company = $4.20 - $3.00

Cash cost to the company = $1.20

Estimated liability = (6,000 - 1,600) * $1.20

Estimated liability = 4,400 * $1.20

Estimated liability = $5,280

So, the estimated liability for outstanding premiums on the 12/31/23 balance sheet is $5,280