As part of a promotion campaign, Funzy Cereal includes one coupon in each issue of various national magazines and offers a toy car in exchange for $1.00 and three coupons. The cars cost Funzy $1.50 each. Experience indicates that 4% of the coupons eventually will be redeemed. During the last month of 2018, the first month of the offer, 12 million coupons were distributed and 240,000 of the coupons were redeemed. What amount should Funzy report as a promotional expense for coupons on its December 31, 2018, income statement?

promotional expense 80,000

Explanation:

12,000,000 x 0.04 = 480,000 coupon

cost 1.5 - price 1 = 0.5 loss

480,000/3 = 160,000 toy car

160,000 x 1.5 = 240,000 value of the toys

160,000 x 0.5 = 80,000 expected promotional expense

redeem toys during december

240,000/3 = 80,000 toy car

80,000 x 0.5 = 40,000 value of the coupon redeem

the accounting will work as follow:

toy car 160,000

cash 160,000

purchase of the toy car.

promotional expense 80,000

premium liablity 80,000

we declare the expense associate with the coupon for the coupon of the period. That's because coupon from december may be redeem on january or other month, so we need to match now the expense associate with december magazines.

premium liablity 40,000

cash 80,000

toy car 120,000

when we deliver the toy car their account decrease, we are receiving cash as well as decreasing the liablity, because less toys are expected to redeem in the future.