Three
independent situations follow.
Situation
1: Marquart Stamp Corporation records stamp service revenue and provides for
the cost of redemptions in the year stamps are sold to licensees. The stamps
can be collected and then redeemed for discounts on future purchases from
Marquart as an incentive for repeat business. Marquart’s past experience
indicates that only 80% of the stamps sold to licensees will be redeemed.
Marquart’s liability for stamp redemptions was $13 million at December 31,
2010. Additional information for 2011 is as follows.
Stamp
service revenue from stamps sold to licensees ………… $9,500,000
Cost
of redemptions (stamps sold prior to 1/1/11) ……………. 6,000,000
If
all the stamps sold in 2011 were presented for redemption in 2012, the
redemption cost would be $5.2 million.
Instructions
What
amount should Marquart report as a liability for stamp redemptions at December
31, 2011?
Situation
2: In packages of its products, ITSS Inc. includes coupons that may be
presented at retail stores to obtain discounts on other ITSS products.
Retailers are reimbursed for the face amount of coupons redeemed plus 10% of
that amount for handling costs. ITSS honours requests for coupon redemption by
retailers up to three months after the consumer expiration date. ITSS estimates
that 60% of all coupons issued will eventually be redeemed. Information
relating to coupons issued by ITSS during 2011 is as follows:
Consumer
expiration date …………………………… 12/31/11
Total
face amount of coupons issued ……………….. $800,000
Total
payments to retailers as at 12/31/11 …………… $330,000
Instructions
(a)
What amount should ITSS report as a liability for unredeemed coupons at
December 31, 2011?
(b)
What amount of premium expense should ITSS report on its 2011 income statement?
Situation
3: Baylor Corp. sold 700,000 boxes of pie mix under a new sales promotion
program. Each box contains one coupon that entitles the customer to a baking
pan when the coupon is submitted with an additional $4.00 from the customer.
Baylor pays $5.00 per pan and $1.00 for handling and shipping. Baylor estimates
that 70% of the coupons will be redeemed even though only 250,000 coupons had
been processed during 2011.
Instructions
(a)
What amount should Baylor report as a liability for unredeemed coupons at
December 31, 2011?
(b)
What amount of expense will Baylor report on its 2011 income statement as a
result of the promotional program?
(c)
Prepare any necessary 2011 journal entries to record the coupon liability and
redemptions.
(AICPA
adapted)
|
1
|
Liability
for stamp redemption, 12/31/10
|
$13,000,000
|
|
|
Cost
of redemption redeemed in 2011
|
(6,000,000)
|
|
|
|
7,000,000
|
|
|
Cost
of redemptions to be redeemed in 2012
|
|
|
|
($5,200,000 x 80%)
|
4,160,000
|
|
|
Liability for stamp redemptions,
12/31/11
|
$11,160,000
|
|
|
|
|
|
2
(a)
|
Total
coupons issued
|
$800,000
|
|
|
Redemption
rate
|
60%
|
|
|
To
be redeemed
|
480,000
|
|
|
Handling
charges ($480,000 X 10%)
|
48,000
|
|
|
Total cost
|
$528,000
|
|
|
|
|
|
|
Total
cost
|
$528,000
|
|
|
Total
payments to retailers
|
330,000
|
|
|
Liability for unredeemed coupons
|
$198,000
|
|
|
|
|
|
(b)
|
Premium
expense
|
$528,000
|
|
3
(a)
|
Boxes
sold
|
700,000
|
|
|
Redemption
rate
|
70%
|
|
|
Total redeemable coupons
|
490,000
|
|
|
|
|
|
|
Coupons
to be redeemed (490,000 – 250,000)
|
240,000
|
|
|
Cost
($6.00 – $4.00)
|
$2.00
|
|
|
Liability for unredeemed coupons
|
$480,000
|
|
|
|
|
|
(b)
|
Total redeemable coupons
|
490,000
|
|
|
Cost ($6.00 – $4.00)
|
$2.00
|
|
|
Coupon expense
|
$980,000
|
|
|
|
|
|
(c)
|
|
|
|
Premium Expense...............................................................
|
980,000
|
|
|
Estimated
Liability for Premiums...........................
|
|
980,000
|
|
|
|
|
|
Estimated Liability for Premiums.......................................
|
500,000
|
|
|
Cash (250,000 X [$4 – $1]).................................................
|
750,000
|
|
|
Inventory
of Premiums (250,000 X $5).................
|
|
1,250,000
|
