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10 February, 14:45

The Easy Pack Company includes one coupon having no expiration date with its deluxe snack pack. Upon return of 10 coupons, Easy Pack will send a silver chip clip, which costs Easy Pack $1.50 each. Past experience indicates that 30% of coupons issued will be redeemed. Easy Pack began this promotion in 2017 and sold 1,000,000 deluxe snack packs. During 2017, 90,000 coupons were received and 9,000 chips clips were distributed to customers. The December 31, 2017, balance sheet should include a liability for coupons outstanding of:

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  1. 10 February, 16:51
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    premium liability (coupon oustanding) $ 1,500

    Explanation:

    We will recognize a liablity based on expected coupon redemption of 10%:

    Sold 1,000,000 deluxe snack = 1,000,000 coupon

    from this we expect 10% will be redeem: 1,000,000 x 10% = 100,000

    Then, calculate the cost that this coupon will generate:

    Thre will be 100,000 redeem coupons which, every 10 is traded for a 1.50 silver chip clip:

    100,000 / 10 x $ 1.50 = $ 15,000

    For the sales of we have a premium liablity of 15,000

    premium expense 15,000

    premium liaiblity 15,000

    We also purchase this silver chip clip:

    Premium Inventory 15,000

    Cash 15,000

    During the year, we adjust for the chips clips distributed:

    9,000 x $ 1.50 = 13,500

    This decreases both, the liablity and the premium inventory.

    Premium Liability 13,500 debit

    Premium Inventory 13,500 credit

    Adjusted year-end balance:

    15,000 - 13,500 = 1,500
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