Exhibit 9-1 The Happy Cereal Company includes a premium in each box of its cereal. For four premiums plus $2.00, customers are entitled to a plastic wiggle worm that costs Happy $4.50 each. Happy expects 60% of the premiums to be redeemed. In 2014, Happy sold 500,000 boxes of cereal and distributed 25,000 wiggle worms.

-Refer to Exhibit 9-1. What is Happy's estimated liability for unredeemed premiums on December 31, 2014?
A) $125,000
B) $187,500
C) $225,000
D) $337,500

Question

Exhibit 9-1 The Happy Cereal Company includes a premium in each box of its cereal. For four premiums plus $2.00, customers are entitled to a plastic wiggle worm that costs Happy $4.50 each. Happy expects 60% of the premiums to be redeemed. In 2014, Happy sold 500,000 boxes of cereal and distributed 25,000 wiggle worms.

-Refer to Exhibit 9-1. What is Happy's estimated liability for unredeemed premiums on December 31, 2014?

-Refer to Exhibit 9-1. What is Happy's estimated liability for unredeemed premiums on December 31, 2014?
A) $125,000
B) $187,500
C) $225,000
D) $337,500

Quizplus · Accepted Answer

Happy expects 60% of the premiums to be redeemed, so 40% will not be redeemed. 40% of 500,000 boxes is 200,000 boxes. Each box requires four premiums, so 200,000 boxes will require 800,000 premiums. Each premium costs $2.00, so the total liability for unredeemed premiums is 800,000 * $2.00 = $1,600,000. However, Happy has already distributed 25,000 wiggle worms, which represents 100,000 premiums. Therefore, the estimated liability for unredeemed premiums on December 31, 2014 is $1,600,000 - (100,000 * $2.00) = $125,000.

Exhibit 9-1 the Happy Cereal Company Includes a Premium in Each