Timo van Leeuwen operates a very busy roadside fruit and vegetable stand from May to October every year as part of his farming operation, which has a December 31 year end. Each time a customer purchases over $10 of produce, Timo gives the customer a special fruit-shaped sticker that can't be copied. If a customer collects 10 of these stickers, they can have $10 worth of produce for no charge. The stickers must be redeemed by June 30 of the following year. During the current year, 25,000 stickers were given out to customers. Timo knows from experience that some stickers will never be cashed in, as the customer may not shop at his stand frequently enough to collect 10 stickers, or they get lost or forgotten. In previous years, 10% of stickers have been redeemed. During the current year, 6% of the stickers given out were redeemed. Timo uses the expense approach to account for premiums and estimates that product costs are 60% of their selling prices.
Instructions
(a) Determine the amount that should be reported as premium expense on the December 31 income statement and the amount of any liability at December 31.
(b) Prepare all the necessary journal entries to record the premium expense associated with the stickers and the related liability at year end.