Milner Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Milner Frosted Flakes boxes and $1.00.The company estimates that 60% of the boxtops will be redeemed.In 2007, the company sold 675,000 boxes of Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls.If the bowls cost Milner Company $2.50 each, how much liability for outstanding premiums should be recorded at the end of 2007?

Question

Quizplus · Accepted Answer

First, we need to calculate the expected number of boxtops that would be redeemed based on the number of boxes sold:
675,000 boxes sold x 0.6 (redemption rate) = 405,000 boxtops expected to be redeemed

Next, we can use the actual number of boxtops redeemed to calculate the actual number of bowls given out:
330,000 boxtops redeemed / 3 boxtops per bowl = 110,000 bowls given out

Since each redeemed boxtop equals one-third of a bowl (since customers need to redeem 3 boxtops to receive one bowl), we can calculate the liability for outstanding premiums as follows:

Liability for outstanding premiums = (expected boxtops redeemed - actual boxtops redeemed) x cost per bowl
Liability for outstanding premiums = (405,000 boxtops - 330,000 boxtops) x $2.50 per bowl
Liability for outstanding premiums = 75,000 boxtops x $2.50 per bowl
Liability for outstanding premiums = $187,500

Therefore, the answer is B and the liability for outstanding premiums that should be recorded at the end of 2007 is $37,500.

Milner Frosted Flakes Company Offers Its Customers a Pottery Cereal