Sycamore Candy Company offers a CD single as a premium for every 6 candy bar wrappers presented by customers together with $3.35. The candy bars are sold by the company to distributors for 30 cents each. The purchase price of each CD to the company is $3.10; in addition, it costs 50 cents to mail each CD. The results of the premium plan for the years 2012 and 2013 are as follows. (All purchases and sales are for cash.)
CDs purchased 397,500 524,700
Candy bars sold 2,994,100 2,751,400
Wrappers redeemed 1,908,000 2,385,000
2012 wrappers expected to be redeemed in 2013 461,100
2013 wrappers expected to be redeemed in 2014 556,500
(a) Prepare the journal entries that should be made in 2012 and 2013 to record the transactions related to the premium plan of the Sycamore Candy Company. (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.)
No. Account Titles and Explanation Debit Credit
1. (To record the pemium inventory.)
2. (To record the sales.)
3. (To record the expense associated with the sale.)
4. (To record the premium liability.)
5. (To record the pemium inventory.)
6. (To record the sales.)
7. (To record the expense associated with the sale.)
8. (To record the premium liability.)
(b) Indicate the amounts for each accounts, 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 2012 and 2013.
Account 2012 2013 Classification
Inventory of Premiums $
1. During 2012, Maverick Inc. became involved in a tax dispute with the IRS. Maverick’s attorneys have indicated that they believe it is probable that Maverick will lose this dispute. They also believe that Maverick will have to pay the IRS between $800,000 and $1,400,000. After the 2012 financial statements were issued, the case was settled with the IRS for $1,200,000. What amount, if any, should be reported as a liability for this contingency as of December 31, 2012?
2. On October 1, 2012, Holmgren Chemical was identified as a potentially responsible party by the Environmental Protection Agency. Holmgren’s management along with its counsel have concluded that it is probable that Holmgren will be responsible for damages, and a reasonable estimate of these damages is $6,000,000. Holmgren’s insurance policy of $9,000,000 has a deductible clause of $500,000. How should Holmgren Chemical report this information in its financial statements at December 31, 2012?
3. Shinobi Inc. had a manufacturing plant in Darfur, which was destroyed in the civil war. It is not certain who will compensate Shinobi for this destruction, but Shinobi has been assured by governmental officials that it will receive a definite amount for this plant. The amount of the compensation will be less than the fair value of the plant but more than its book value. How should the contingency be reported in the financial statements of Shinobi Inc.?
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