(Premium Entries and Financial Statement Presentation) Sycamore Candy Company offers an MP3 download (seven-single medley) as a premium for every five candy bar wrappers presented by customers together with \(2.50. The candy bars are sold by the company to distributors for 30 cents each. The purchase price of each download code to the company is \)2.25. In addition, it costs 50 cents to distribute each code. The results of the premium plan for the years 2017 and 2018 are as follows. (All purchases and sales are for cash.)

20172018

MP3 codes purchased 250,000 330,000

Candy bars sold 2,895,400 2,743,600

Wrappers redeemed 1,200,000 1,500,000

2017 wrappers expected to be redeemed in 2018 290,000

2018 wrappers expected to be redeemed in 2019 350,000

Instructions

(a) Prepare the journal entries that should be made in 2017 and 2018 to record the transactions related to the premium plan of the Sycamore Candy Company.

(b) Indicate the account names, amounts, and classifications of the items related to the premium plan that would appear on the balance sheet and the income statement at the end of 2017 and 2018

Date

Accounts & Explanations

Debit

Credit

2017

Inventory of Premiums (250,000 x $2.25)

$562,500

Cash

$562,500

(To record purchase of MP3 downloads)

2017

Cash (2,895,400 x 0.30)

$868,620

Sales Revenue

$868,620

(To record sale of candy bars)

2017

Cash

$480,000

Premium Expense

$60,000

Inventory of Premiums

$540,000

(To record the redemption of wrappers)

Dec.31,2017

Premium Expense

(290,000 / 5) x ($2.25+$0.50-$2.50)

$14,500

Premium Liability

$14,500

(To record the estimated premium claims)

For Year 2018

2018

Inventory of Premiums (330,000 x $2.25)

$742,500

Cash

$742,500

(To record purchase of MP3 downloads)

2018

Cash (2,743,600 x 0.30)

$823,080

Sales Revenue

$823,080

(To record sale of candy bars)

2018

Cash ($750,000 - $150,000)

$600,000

Premium Liability

$14,500

Premium Expense

$60,500

Inventory of Premiums

$675,000

(To record the redemption of wrappers)

Dec.31,2018

Premium Expense

(350,000 / 5) x ($2.25+$0.50-$2.50)

$17,500

Premium Liability

$17,500

(To record the estimated premium claims)

Total wrappers redeemed

1,200,000

Ratio of codes

5

Number of codes (1,200,000 / 5)

240,000

Purchase price of codes

(240,000 x $2.25)

$540,000

Distribution cost

(240,000 x $0.50)

$120,000

Total cost

$660,000

Less: Cash received

(240,000 x $2.50)

($600,000)

Premium expense for 2017

$60,000

Total wrappers redeemed

1,500,000

Ratio of codes

5

Number of codes (1,200,000 / 5)

300,000

Purchase price of codes

(300,000 x $2.25)

$675,000

Distribution cost

(300,000 x $0.50)

$150,000

Total cost

$825,000

Less: Cash received

(300,000 x $2.50)

($750,000)

Premium expense for codes

$75,000

Less: Claim of 2017

($14,500)

Premium expense for 2018

$60,500

For Year 2017

Balance sheet

Account

Amount

Classification

Inventory of premiums

(250,000-240,000) x $2.25

$22,500

Current asset

Premium liability

$14,500

Current liability

Income statement

Account

Amount

Classification

Premium expense

($60,000+$14,500)

$74,500

Selling expense

For Year 2018

Balance sheet

Account

Amount

Classification

Inventory of premiums

(10,000+330,000-300,000) x $2.25

$90,000

Current asset

Premium liability

$17,500

Current liability

Income statement

Account

Amount

Classification

Premium expense

($60,500+$17,500)

$78,000

Selling expense