PREMIUM LIABILITY Love Company included one coupon in each package sold. A premium is offered to customers who send in 10 coupons. | | 2019 | 2020 | | :---------------------------------------------- | :------ | :------ | | Number of packages sold | 500,000 | 800,000 | | Number of premiums purchased at P40 each | 30,000 | 60,000 | | Number of premiums distributed | 20,000 | 50,000 | | Number of premiums to be distributed next period | 5,000 | 3,000 | 1. What amount should be reported as premium expense for 2019?
Answer (2)
To determine the premium expense for Love Company in 2019, we need to understand the context provided by the data. The company includes a coupon in each package they sell, and customers can receive a premium by sending in 10 coupons.
We'll follow these steps to calculate the premium expense:
Calculate the number of coupons collected and premiums distributed:
In 2019, Love Company sold 500,000 packages, meaning they issued 500,000 coupons.
It takes 10 coupons to receive a premium, so a maximum of 50,000 premiums could potentially be distributed (500,000 packages / 10 coupons per premium).
Consider the actual number of premiums distributed:
According to the data, the company distributed 20,000 premiums in 2019.
Calculate the expense for the premiums distributed:
Each premium costs P40.
Therefore, the premium expense for 2019 is calculated as follows:
20 , 000 premiums × P 40 per premium = P 800 , 000
So, the amount to be reported as premium expense for 2019 is P800,000 .
The premium expense for Love Company in 2019 is calculated by multiplying the number of premiums distributed (20,000) by the cost per premium (P40), resulting in a total premium expense of P800,000. Thus, Love Company should report a premium expense of P800,000 for 2019.
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