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8 November, 17:11

As part of a promotion campaign, Funzy Cereal includes one coupon in each issue of various national magazines and offers a toy car in exchange for $1.00 and three coupons. The cars cost Funzy $1.50 each. Experience indicates that 4% of the coupons eventually will be redeemed. During the last month of 2018, the first month of the offer, 12 million coupons were distributed and 240,000 of the coupons were redeemed. What amount should Funzy report as a promotional expense for coupons on its December 31, 2018, income statement?

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  1. 8 November, 17:16
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    promotional expense 80,000

    Explanation:

    12,000,000 x 0.04 = 480,000 coupon

    cost 1.5 - price 1 = 0.5 loss

    480,000/3 = 160,000 toy car

    160,000 x 1.5 = 240,000 value of the toys

    160,000 x 0.5 = 80,000 expected promotional expense

    redeem toys during december

    240,000/3 = 80,000 toy car

    80,000 x 0.5 = 40,000 value of the coupon redeem

    the accounting will work as follow:

    toy car 160,000

    cash 160,000

    purchase of the toy car.

    promotional expense 80,000

    premium liablity 80,000

    we declare the expense associate with the coupon for the coupon of the period. That's because coupon from december may be redeem on january or other month, so we need to match now the expense associate with december magazines.

    premium liablity 40,000

    cash 80,000

    toy car 120,000

    when we deliver the toy car their account decrease, we are receiving cash as well as decreasing the liablity, because less toys are expected to redeem in the future.
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