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Ivanhoe Company offers a set of building blocks to customers who send in 3 UPC codes from Ivanhoe cereal, along with 50¢
Ivanhoe Company offers a set of building blocks to customers who send in 3 UPC codes from Ivanhoe cereal, along with 50¢. The block sets cost Ivanhoe $1.00 each to purchase and 60¢ each to mail to customers. During 2020, Ivanhoe sold 1,248,000 boxes of cereal. The company expects 30% of the UPC codes to be sent in. During 2020, 124,800 UPC codes were redeemed. Prepare Ivanhoe's December 31, 2020, adjusting entry. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Account Titles and Explanation
Debit
Credit
Expert Solution
| Journal Entry: | ||
| Account Titles and Explanation | Debit | Credit |
| Premium Expense | $91,520 | |
| Liability for Expense | $91,520 |
Workings:
UPC codes expected to be sent (1,248,000 * 30%) = 374,400
UPC codes already redeemed = 124,800
Estimated future redemptions = 374,400-124,800 = 249,600
Cost of estimated claims outstanding = (249,600/3 * ($1 + $0.60 - $0.50) ) = $91,520
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