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Chapter 13: 9P (page 658)

(Premium Entries and Financial Statement Presentation) Sycamore Candy Company offers an MP3 download (seven-single medley) as a premium for every five candy bar wrappers presented by customers together with \(2.50. The candy bars are sold by the company to distributors for 30 cents each. The purchase price of each download code to the company is \)2.25. In addition, it costs 50 cents to distribute each code. The results of the premium plan for the years 2017 and 2018 are as follows. (All purchases and sales are for cash.)

2017 2018

MP3 codes purchased 250,000 330,000

Candy bars sold 2,895,400 2,743,600

Wrappers redeemed 1,200,000 1,500,000

2017 wrappers expected to be redeemed in 2018 290,000

2018 wrappers expected to be redeemed in 2019 350,000

Instructions

(a) Prepare the journal entries that should be made in 2017 and 2018 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 2017 and 2018

Short Answer

Expert verified

(a) Journal entries for the years 2017 and 2018 are recorded in Step 1.

(b) Indications of accounts, amount and classifications are reported in Step 3.

Step by step solution

01

(a) Journal entry for 2018 and 2017

Date

Accounts & Explanations

Debit

Credit

2017

Inventory of Premiums (250,000 x $2.25)

$562,500

Cash

$562,500

(To record purchase of MP3 downloads)

2017

Cash (2,895,400 x 0.30)

$868,620

Sales Revenue

$868,620

(To record sale of candy bars)

2017

Cash

$480,000

Premium Expense

$60,000

Inventory of Premiums

$540,000

(To record the redemption of wrappers)

Dec.31,2017

Premium Expense

(290,000 / 5) x ($2.25+$0.50-$2.50)

$14,500

Premium Liability

$14,500

(To record the estimated premium claims)

2018

Inventory of Premiums (330,000 x $2.25)

$742,500

Cash

$742,500

(To record purchase of MP3 downloads)

2018

Cash (2,743,600 x 0.30)

$823,080

Sales Revenue

$823,080

(To record sale of candy bars)

2018

Cash ($750,000 - $150,000)

$600,000

Premium Liability

$14,500

Premium Expense

$60,500

Inventory of Premiums

$675,000

(To record the redemption of wrappers)

Dec.31,2018

Premium Expense

(350,000 / 5) x ($2.25+$0.50-$2.50)

$17,500

Premium Liability

$17,500

(To record the estimated premium claims)

02

Calculations of premium expenses and related accounts for 2018 and 2017

For the year 2017 :

Total wrappers redeemed

1,200,000

Ratio of codes

5

Number of codes (1,200,000 / 5)

240,000

Purchase price of codes

(240,000 x $2.25)

$540,000

Distribution cost

(240,000 x $0.50)

$120,000

Total cost

$660,000

Less: Cash received

(240,000 x $2.50)

($600,000)

Premium expense for 2017

$60,000

For the year 2018:

Total wrappers redeemed

1,500,000

Ratio of codes

5

Number of codes (1,200,000 / 5)

300,000

Purchase price of codes

(300,000 x $2.25)

$675,000

Distribution cost

(300,000 x $0.50)

$150,000

Total cost

$825,000

Less: Cash received

(300,000 x $2.50)

($750,000)

Premium expense for codes

$75,000

Less: Claim of 2017

($14,500)

Premium expense for 2018

$60,500

03

(b) Indications of accounts of balance sheet and income statement

Balance sheet 2017

Account

Amount

Classification

Inventory of premiums

(250,000-240,000) x $2.25

$22,500

Current asset

Premium liability

$14,500

Current Liability

Income statement 2017

Account

Amount

Classification

Premium expense

($60,000+$14,500)

$74,500

Selling expense

Balance sheet 2018

Account

Amount

Classification

Inventory of premiums

(10,000+330,000-300,000) x $2.25

$90,000

Current asset

Premium liability

$17,500

Current Liability

Income statement 2018

Account

Amount

Classification

Premium expense

($60,500+$17,500)

$78,000

Selling expense

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Most popular questions from this chapter

(Asset Retirement Obligation) Oil Products Company purchases an oil tanker depot on January 1, 2017, at a cost of \(600,000. Oil Products expects to operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove the underground storage tanks. It is estimated that it will cost \)75,000 to dismantle the depot and remove the tanks at the end of the depot鈥檚 useful life.

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Question: (Cash Flow Hedge) LEW Jewelry Co. uses gold in the manufacture of its products. LEW anticipates that it will

need to purchase 500 ounces of gold in October 2017, for jewelry that will be shipped for the holiday shopping season. However,

if the price of gold increases, LEW鈥檚 cost to produce its jewelry will increase, which would reduce its profit margins.

To hedge the risk of increased gold prices, on April 1, 2017, LEW enters into a gold futures contract and designates this

futures contract as a cash flow hedge of the anticipated gold purchase. The notional amount of the contract is 500 ounces, and

the terms of the contract give LEW the right and the obligation to purchase gold at a price of \(300 per ounce. The price will be

good until the contract expires on October 31, 2017.

Assume the following data with respect to the price of the futures contract and the gold inventory purchase:

Date Spot Price for October Delivery

April 1, 2017 \)300 per ounce

June 30, 2017 310 per ounce

September 30, 2017 315 per ounce

Instructions

Prepare the journal entries for the following transactions.

(a) April 1, 2017鈥擨nception of the futures contract, no premium paid.

(b) June 30, 2017鈥擫EW Co. prepares financial statements.

(c) September 30, 2017鈥擫EW Co. prepares financial statements.

(d) October 10, 2017鈥擫EW Co. purchases 500 ounces of gold at \(315 per ounce and settles the futures contract.

(e) December 20, 2017鈥擫EW sells jewelry containing gold purchased in October 2017 for \)350,000. The cost of the finished

goods inventory is $200,000.

(f) Indicate the amount(s) reported on the balance sheet and income statement related to the futures contract on June 30, 2017.

(g) Indicate the amount(s) reported in the income statement related to the futures contract and the inventory transactions

on December 31, 2017.-

(Payroll Tax Entries) The following is a payroll sheet for Otis Import Company for the month of September 2017. The company is allowed a 1% unemployment compensation rate by the state; the federal unemployment tax rate is 0.8% and the maximum for both is \(7,000. Assume a 10% federal income tax rate for all employees and a 7.65% FICA tax on employee and employer on a maximum of \)118,500. In addition, 1.45% is charged both employer and employee for an employee鈥檚 wages in excess of \(118,500 per employee.

Name

Earnings to Aug. 31

September earnings

Income tax Withholdings

FICA

Unemployment tax

State

Federal

B.D. Williams

\)6,800

$800

D. Raye

6,500

700

K. Baker

7,600

1,100

F. Lopez

13,600

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A. Daniels

107,000

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B. Kingston

112,000

16,000

Instructions

(a) Complete the payroll sheet and make the necessary entry to record the payment of the payroll.

(b) Make the entry to record the payroll tax expenses of Otis Import Company.

(c) Make the entry to record the payment of the payroll liabilities created. Assume that the company pays all payroll liabilities at the end of each month.

Journal Entries for Fair Value and Equity Methods) The following are two independent situations.

Situation 1: Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of Martinez Fashion at a total cost of \(13 per

share on March 18, 2017. On June 30, Martinez declared and paid \)75,000 cash dividends to all stockholders. On December 31,

Martinez reported net income of \(122,000 for the year. At December 31, the market price of Martinez Fashion was \)15 per share.

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Prepare all necessary journal entries in 2017 for both situations.

(Refinancing of Short-Term Debt) On December 31, 2017, Hattie McDaniel Company had \(1,200,000 of short-term debt in the form of notes payable due February 2, 2018. On January 21, 2018, the company issued 25,000 shares of its common stock for \)38 per share, receiving \(950,000 proceeds after brokerage fees and other costs of issuance. On February 2, 2018, the proceeds from the stock sale, supplemented by an additional \)250,000 cash, are used to liquidate the \(1,200,000 debt. The December 31, 2017, balance sheet is issued on February 23, 2018.

Instructions

Show how the \)1,200,000 of short-term debt should be presented on the December 31, 2017, balance sheet, including note disclosure
See all solutions

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