To kick off its 201l advertising campaign, Rachel’s Breakfast Cereal is offering a $1 refund in exchange for five cereal box top. The company estimates that the tops of 10 percent of the cereal boxes sold will be returned for the refund. The cereal boxes ale sold for $2.00 each. During 2011 and 2012, 20,000 and 28,000 cereal boxes are sold, respectively, and 1,500 and 2,000 box tops are received for refunds during 2011 and 2012, 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 2011 and 2012.

b. Compute the liabilities associated with the potential refunds as of the end of 2011 and 2012.