Jennifer Cakes places a coupon in each box of its product. Customers may send in five coupons and $3, and the company will send them a recipe book. Sufficient books were purchased at a cost of $5 each. A total of 400,000 boxes of product were sold in 2014. It was estimated that 6% of the coupons would be redeemed. During 2014, 8,000 coupons were redeemed. Which entry should be made at December 31, 2014?

Question

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The estimated number of coupons to be redeemed is 6% of 400,000, which is 24,000 coupons. Since 8,000 coupons were redeemed, the remaining estimated liability is for 16,000 coupons (24,000 - 8,000). The entry should reflect the cost of these remaining coupons, which is 16,000 / 5 = 3,200 recipe books. At $5 each, the cost is $16,000. However, the correct entry should reflect the liability for the estimated premium claims outstanding, which is $6,400 (8,000 coupons redeemed / 5 = 1,600 books at $5 each).

Jennifer Cakes Places a Coupon in Each Box of Its