Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Palmer Frosted Flakes boxes and $1. The company estimates that 60% of the boxtops will be redeemed. In 2018, the company sold 1,350,000 boxes of Frosted Flakes and customers redeemed 660,000 boxtops receiving 220,000 bowls. If the bowls cost Palmer Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2018?

a. $540,000

b. $100,000

c. $150,000

d. $276,000

b. $100,000

Explanation:

Because the company estimates that 60% of the boxtops will be redeemed and the actual sold boxes was 1,350,000; the the estimated boxtops to be returned is 810,000 ( = 60% * 1,350,000)

In 2018, customers redeemed 660,000 boxtops, then estimated of boxtops not redeemed is 150,000 boxtops

As the campaign regulated, 3 boxtops is received back 1 bowl, the company will have to redeem 50,000 bowl for 150,000 boxtops (50,000 = 150,000/3)

For each bowl, the company can receive $1 back from customer and cost $3, so the net cost is $2 ( = $3-$1)

The liability for outstanding premiums should be recorded at the end of 2018 is $100,000 (=$2 x 50,000)