Funzy Cereal includes one coupon in each package of Wheatos that it sells and offers a toy car in exchange for $1.00 and three coupons. The cars cost Funzy $1.50 each. Experience indicates that 40% of the coupons eventually will be redeemed. During the last month of 2013, the first month of the offer, Funzy sold 12 million boxes of Wheatos and 2.4 million of the coupons were redeemed. What amount should Funzy report as a promotional expense for coupons on its December 31, 2013, income statement?
A)$0.
B)$400,000.
C)$800,000.
D)$1,200,000.

Question

Quizplus · Accepted Answer

Funzy should report the cost of the toy cars as the promotional expense, since only 40% of the coupons are expected to be redeemed.

The number of coupons expected to be redeemed is:

12,000,000 boxes x 1 coupon per box x 40% redemption rate = 4,800,000 coupons

Since three coupons are required to obtain one toy car, Funzy must have given out:

2.4 million / 3 = 800,000 toy cars

The cost of the toy cars is:

800,000 cars x $1.50 per car = $1,200,000

Therefore, the promotional expense for coupons is $1,200,000, which is choice (D). However, the question asks for the amount to be reported on the income statement, which should be the cost of the toy cars only, so the answer is (C), $800,000.

Funzy Cereal Includes One Coupon in Each Package of Wheatos