To kick off its 2014 advertising campaign, Rachel’s Breakfast Cereal is offering a $1 refund in exchange for five cereal box tops. The company estimates that the tops of 10 percent of the cereal boxes sold will be returned for the refund. The cereal boxes are sold for $2.00 each. During 2014 and 2015, 20,000 and 28,000 cereal boxes are sold, respectively, and 1,500 and 2,000 box tops are received for refunds during 2014 and 2015, respectively.

REQUIRED:

a. Prepare the journal entries to record the sale of the cereal boxes, the recognition of the contingent liability associated with the potential refunds, and the actual refund payments for 2014 and 2015.

b. Compute the liabilities associated with the potential refunds as of the end of 2014 and 2015.