May Wah Company is a toy manufacturer. Consider the following situations:

Situation 2: During the current year, May Wah began to promote a new toy by including a coupon, redeemable for a movie ticket, in each toy box. The movie ticket, which costs May Wah $50, is purchased in advance and then mailed to the customer when the company receives the coupon. May Wah estimated, on the basis of past experience, that 60% of coupons would be redeemed. 40% of the coupons were actually redeemed during the current year of sales, and the remaining 20% of the coupons are expected to be redeemed next year.

Situation 3: For a different toy, Mah Wah started another promotion programme by including a coupon, redeemable for a movie ticket in 20X2. The movie ticket, which costs May Wah $50, is purchased in advance and then mailed to the customer when the company receives the coupon. In 20X2, no coupon issued by Mah Wah was redeemed by customers. At the end of 20X2, based on the past industry experience, May Wah estimated 35% of the coupons issued in 20X2 would be redeemed. In 20X3, customers actually redeemed 80% of the coupons issued in 20X2.

REQUIRED:

May Wah is finalising its accounts for 20X2. As an accountant of the company, you are required to, regarding situation 2 and 3 only:

Advise and explain how May Wah should account for the above situations and prepare journal entries to record the purchase of movie tickets, the redemptions of movie tickets by customers, and where appropriate, the provisions to be made for 20X2 and 20X3.

Hints: Situation 2:

20X2 Dr Prepayment Cr Bank Purchase of movie tickets in advance.

Dr Coupon redemption expense Cr Prepayment Redemption of movie tickets this year.

Dr Coupon redemption expense Cr Provision for coupon redemption Accrual of coupons this year (to be redeemed next year).

Situation 3:

Dr Prepayment Cr Bank

Purchase of movie tickets in advance.

Dr Coupon redemption expense Cr Provision for coupon redemption

Accrual of coupons this year (to be redeemed next year).

20X3 Dr Provision for coupon redemption Cr Prepayment

Reversal of coupons accrual made last year after redemption of tickets this year.

Dr Coupon redemption expense Cr Bank

Further purchase of movie tickets this year to cope with additional redemption.