Premium Obligation
Response to the following problem:
On the back of its cereal boxes, the Tiger Cereal Company offers a premium to its customers. The premium, a toy truck, may be claimed by sending in $1 plus 10 coupons; one coupon is included in each box of cereal sold. The company estimates, based on past experience, that 60% of the coupons will be redeemed. During 2010, the company purchased 240,000 toy trucks at $1.25 each for the premium promotion and sold 5,000,000 boxes of cereal at $1.80 per box. In 2010, 2,200,000 coupons were redeemed.
Required
1. Prepare the journal entries related to the previous promotion (including sales) for 2010.
2. Show how the items related to the premium plan would be reported on the December 31, 2010 balance sheet.