Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Palmer Frosted Flakes boxes and $1.00.The company estimates that 60% of the boxtops will be redeemed.In 2010, the company sold 675,000 boxes of Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls.If the bowls cost Palmer Company $2.50 each, how much liability for outstanding premiums should be recorded at the end of 2010?

Question

Quizplus · Accepted Answer

The company expects 60% of 675,000 boxtops to be redeemed, which is 405,000 boxtops. Since 330,000 boxtops have already been redeemed, 75,000 boxtops are still expected to be redeemed. This translates to 25,000 more bowls (75,000/3). At $2.50 per bowl, the liability is $62,500. However, since customers pay $1.00 per bowl, the net cost per bowl is $1.50. Therefore, the liability is 25,000 bowls x $1.50 = $37,500.

Palmer Frosted Flakes Company Offers Its Customers a Pottery Cereal