Question

Wynn Company offers a set of building blocks to customers who send in 3 UPC codes from Wynn cereal, along with 50¢. The block sets cost Wynn $1.10 each to purchase and 60¢ each to mail to customers. During 2017, Wynn sold 1,200,000 boxes of cereal. The company expects 30% of the UPC codes to be sent in. During 2017, 120,000 UPC codes were redeemed. Prepare Wynn’s December 31, 2017, adjusting entry.

Short answer

Premium expense will be debited and Premium liability will be credited by $96,000, respectively.

Step-by-step solution

Calculation of premium expense

Particular	Amount
Expected UPC codes to be sent in (1,200,000 x 30%)	$360,000
Less: UPC codes redeemed	(120,000)
Estimated future redemptions	$240,000
Premium liability (240,000 / 3) x ($1.10+$0.60-$0.50)	$96,000

Journal entry

Date	Accounts & Explanations	Debit	Credit
Dec.31,2017	Premium Expense	$96,000
	Premium Liability		$96,000
	To record the cost of the estimated outstanding claim