Exhibit 9-3 John Company includes three coupons in each package of cookies it sells. In exchange for 20 coupons, a customer will receive a cookie sheet. John estimates that 30% of the coupons will be redeemed. In 2014, John sold 4,000,000 boxes of cookies and purchased 150,000 Cookie sheets at $2.50 each. During the year, 970,000 coupons were redeemed.

-Refer to Exhibit 9-3. What amount should John report as estimated premium claims outstanding at December 31, 2014?

Question

-Refer to Exhibit 9-3. What amount should John report as estimated premium claims outstanding at December 31, 2014?

Quizplus · Accepted Answer

To calculate the estimated premium claims outstanding, we need to multiply the number of coupons expected to be redeemed by the cost of the premium.

Number of coupons expected to be redeemed: 30% of 3 coupons per box x 4,000,000 boxes sold = 3,600,000 coupons

Premium cost per coupon: $2.50

Estimated premium claims outstanding: 3,600,000 coupons x $2.50 = $9,000,000

However, we know that only 970,000 coupons were actually redeemed, so we need to subtract that amount from our calculation:

$9,000,000 - (970,000 x $2.50) = $6,328,750

Therefore, the amount John should report as estimated premium claims outstanding at December 31, 2014 is $328,750.

Exhibit 9-3 John Company Includes Three Coupons in Each Package