Vaughn Company includes 1 coupon in each box of soap powder that it packs, and 10 coupons are redeemable for a premium (a kitchen utensil). In 2017, Vaughn Company purchased 8,000 premiums at 80 cents each and sold 117,000 boxes of soap powder at $3.50 per box; 42,500 coupons were presented for redemption in 2017. It is estimated that 60% of the coupons will eventually be presented for redemption. Prepare all the entries that would be made relative to sales of soap powder and to the premium plan in 2017.

Answer and Explanation:

The journal entries are as follows:

1. Premium inventory (8,000 × $0.80) $6,400

          To cash $6,400

(being the inventory is purchased for cash)

2. Cash Dr (117,000 × $3.50) $409,500

        To sales revenue $409,500

(Being the cash received is recorded)

3. Premium expense $3,400 (42,500 × 10% × $0.80)

          To  Premium inventory $3,400

(Being premium expense is recorded)

4. Premium expense Dr $2,216

       To premium liability $2,216

(Being premium expense is recorded)

Working note

= (117,000 × 60%) - (42,500) × 0.10 × 0.80

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