Sanders Co. includes one coupon in each bag of cat food it sells. In return for 4 coupons, customers receive a teddy bear that the company purchases for $1.20 each. Sanders's experience indicates that 60 percent of the coupons will be redeemed. During 2018, 100,000 bags of cat food were sold, 12,000 teddy bears were purchased, and 50,000 coupons were redeemed. During 2019, 120,000 bags of cat food were sold, 16,000 teddy bears were purchased, and 60,000 coupons were redeemed.

1. Calculate the premium liability at the end of 2018. Show your workings.

2. Calculate the actual number of teddy bears given to customers in 2019. Show your workings.

3. Why do companies want to offer premium to customers? Explain the accounting principle and treatment for consideration payable.

4. A clerical staff has tried to calculate the premium expense to be shown in the income statement for 2018. He said that the figure of actual number of coupons redeemed in year 2018 is required in order to calculate the premium expense for 2018. Do you agree with him? Why? Also, he argued that the figure of sales volume of cat food in 2018 is not required to calculate the premium expense for 2018. Do you agree with him? Why? (No need to show any calculation)

5. The clerical staff also said that the sales volume of cat food in 2018 is not relevant for him to calculate the premium liability at 31 Dec 2018. Do you agree with him? Explain the reasons. (No need to show any calculation)

6. If cash with an amount of less than $1.2 is received from customer for each teddy bear given, explain how this would affect the premium expense in 2018? (No need to show any calculation)

7. If cash with an amount of less than $1.2 is received from customer for each teddy bear given, explain how this would affect the premium liability at the end of 2018? (No need to show any calculation)
8. The clerical staff argued that if the sales volume of cat food in 2018 is recorded wrongly, it would not have any effect on the accurateness of the premium liability at the end of 2019, because premium liability at the end of 2019 is related to sales volume of cat food in 2019, but not related to the sales volume of cat food in 2018. Do you agree with him? Explain the reasons. (No need to show any calculation)