Sheridan company offers its customers a pottery cereal bowl if they send in 3 boxtops from Sheridan Frosted Flakes boxes and $1. The company estimates that 60% of the boxtops will be redeemed. In 2021, the company sold 1344000 boxes of Frosted Flakes and customers redeemed 630000 boxtops receiving 210000 bowls. If the bowls cost Sheridan Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2021

$117,600

Explanation:

Boxes of Frosted Flakes ×Estimate of Box Tops to be redeemed

1,344,000×60%= 806,000

806,000- 630,000 (Box Tops redeemed) =176,400

Estimate of Box Tops left to be received /Number of Box Tops Needed per bowl

176,400/3= 58,800 Total bowls estimated to be sent to customers in future

58,800 x 2.00 (The Cost of bowls to company was $3 while the cash to be received from customer was $1)

= $117,600 Which will be the total premium liability to be recorded.

$117,600

Explanation: From the above question, In 2021, the company sold 1,344,000 boxes of Frosted Flakes.

1,344,000 /3 = 448,000 pottery cereal bowl is expected to be redeemed in the year.

customers redeemed 630,000 boxtops receiving 210,000 bowls.

estimates that 60% of the boxtops will be redeemed = 1,344,000 * 60% = 806,400 and 630,000 was redeemed = 806,400 - 630,000 = 176,400 unredeemed at the end of the year.

Outstanding liability for 2021 = 176,400/3 = 58,800 x ($3 - $1)

= 58,800 x $2 = $117,600

Note that customers get a pottery cereal bowl if they send in 3 boxtops from Sheridan Frosted Flakes boxes and $1 and the bowl costs $3. To the actual cost estimate of the bowl is $3 -$1 = $2

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