Sycamore Candy Company offers a CD single as a premium for every five candy bar wrappers presented by customers together with $2.50. The candy bars are sold by the company to distributors for 30 cents each. The purchase price of each CD to the company is $2.25; in addition it costs 50 cents to mail each CD. The results of the premium plan for the years 2010 and 2011 are as follows. (All purchases and sales are for cash.)
2010 2011
CDs purchased 250,000 330,000
Candy bars sold 2,895,400 2,743,600
Wrappers redeemed 1,200,000 1,500,000
2010 wrappers expected to be redeemed in 2011 290,000
2011 wrappers expected to be redeemed in 2012 350,000
Instructions:
(a) Prepare the journal entries that should be made in 2010 and 2011 to record the transactions related to the premium plan of the Sycamore Candy Company.
(b) Indicate the account names, amounts, and classifications of the items related to the premium plan that would appear on the balance sheet and the income statement at the end of 2010 and 2011.