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Pharoah Co
Pharoah Co. includes one coupon in each bag of dog food it sells. In return for 4 coupons, customers receive a dog toy that the company purchases for $1.30 each. Pharoah's experience indicates that 60 percent of the coupons will be redeemed. During 2020, 93,000 bags of dog food were sold, 11,640 toys were purchased, and 37,200 coupons were redeemed. During 2021, 117,200 bags of dog food were sold, 16,050 toys were purchased, and 58,600 coupons were redeemed.
Determine the premium expense to be reported in the income statement and the premium liability on the balance sheet for 2020 and 2021.
Expert Solution
Computation of Premium Expense to be reported in the income statement and the Premium Liability on the balance sheet for 2020 and 2021:
Year 2020:
Premium Expense = (93,000 bags / 4 coupons) * 60% * $1.30 = $18,135
Estimated Liability = $18,135 - (37,200 coupons / 4 coupons) * $1.30) = $11,485.50
Year 2021:
Premium Expense = ( 117,200 bags / 4 coupons) * 60% * $1.30 = $22,854
Estimated Liability = $11,485.5 + $22,854 - (58,600 coupons / 4 coupons) * $1.30 = $15,294.50
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