To increase the sales of its Sugar Kids breakfast cereal, KW Foods Limited (KW) places one coupon in each cereal box. Five coupons are redeemable for a premium consisting of a child’s hand puppet. In 2023, KW purchases 40,000 puppets at $1.50 each and sells 480,000 boxes of Sugar Kids at $3.75 a box. Ignore any cost of goods sold. KW estimates that $0.20 of the sale price relates to the hand puppet to be awarded. From its experience with other similar premium offers, KW estimates that 40% of the coupons issued will be mailed back for redemption. During 2023, 115,000 coupons are presented for redemption. KW is a private company following ASPE.

Instructions

a. Prepare the journal entries that should be recorded in 2023 relative to the premium plan, assuming that KW follows a policy of charging the cost of coupons to expense as they are redeemed and adjusting the liability account at year end.

b. Prepare the journal entries that should be recorded in 2023 relative to the premium plan, assuming that KW follows a policy of charging the full estimated cost of the premium plan to expense when the sales are recognized.

c. How would the accounts resulting from the entries in parts (a) and (b) be presented on the 2023 financial statements?

d. Prepare the journal entries that should be recorded in 2023 relative to the premium plan, assuming that KW follows IFRS and accounts for its promotional programs in accordance with the revenue approach and IFRS 15.

e. How would the accounts resulting from the entries in part (d) be presented on the 2023 financial statements?

f. Compare your answer to part (c) with your answer to part (e). Which approach to accounting for premiums would you recommend to KW? Why?