Sterling Co. includes one coupon in each bag of dog food it sells. In return for 4 coupons, customers receieve a dog toy that the company purchases for $1.50 each. Sterling's experience indicates that 60 percent of the coupons will be redeemed. During 2017, 150,000 bags of dog food were sold, 18,000 toys were purchased, and 60,000 coupons were redeemed. During 2018, 180,000 bags of dog food were sold, 24,000 toys were purchased, and 90,000 coupons were redeemed.

Instructions:

a. Calculate and prepare all journal entries for 2017 and 2018 to record the purchases of dog toys, estimated liability and redemption of coupons.

b. Determine the premium expense to be reported in the income statement and the premium liability on the balance sheet for 2017 and 2018.