Question

In: Accounting

Presented below are three independent situations. 1. Ivanhoe Stamp Company records stamp service revenue and provides...

Presented below are three independent situations.

1. Ivanhoe Stamp Company records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Ivanhoe’s past experience indicates that only 80% of the stamps sold to licensees will be redeemed. Ivanhoe’s liability for stamp redemptions was $13,180,300 at December 31, 2019. Additional information for 2020 is as follows.

Stamp service revenue from stamps sold to licensees $10,060,100
Cost of redemptions (stamps sold prior to 1/1/20) 5,935,600


If all the stamps sold in 2020 were presented for redemption in 2021, the redemption cost would be $5,191,300. What amount should Ivanhoe report as a liability for stamp redemptions at December 31, 2020?

Liability for stamp redemptions at December 31, 2020 $ ????????????????


2. In packages of its products, Shamrock Inc. includes coupons that may be presented at retail stores to obtain discounts on other Shamrock products. Retailers are reimbursed for the face amount of coupons redeemed plus 10% of that amount for handling costs. Shamrock honors requests for coupon redemption by retailers up to 3 months after the consumer expiration date. Shamrock estimates that 60% of all coupons issued will ultimately be redeemed. Information relating to coupons issued by Shamrock during 2020 is as follows.

Consumer expiration date 12/31/20
Total face amount of coupons issued $744,400
Total payments to retailers as of 12/31/20 320,560


What amount should Shamrock report as a liability for unredeemed coupons at December 31, 2020?

Liability for unredeemed coupons $????????????????????


3. Bridgeport Company sold 692,300 boxes of pie mix under a new sales promotional program. Each box contains one coupon, which submitted with $4.50, entitles the customer to a baking pan. Bridgeport pays $6.50 per pan and $1.00 for handling and shipping. Bridgeport estimates that 70% of the coupons will be redeemed, even though only 244,200 coupons had been processed during 2020. What amount should Bridgeport report as a liability for unredeemed coupons at December 31, 2020?

Liability for unredeemed coupons at December 31, 2020 $ ?????????????????/

Solutions

Expert Solution

1. Calculation of liability for stamp redemption on December 31, 2020

Liability for stamp redemption on December 31, 2019 $13,180,300
Less: Cost of redemption redeemed in 2020 $(5,935,600)
$7,244,700
Add: Cost of redemption to be redeemed in 2021 ($5,191,300 * 80%) $4,153,040
Liability for stamp redemption on December 31, 2020 $11,397,740

2. Calculation of unredeemed coupons on December 31, 2020

Total coupons to be redeemed ($744,400 * 60%) $446,640
Add: Handling charges ($446,640 * 10%) $44,664
Total cost $491,304
Less: Total payment to retailers $(320,560)
Liability for unredeemed coupons on December 31, 2020 $170,744

3. Calculation for liability for unredeemed coupons at December 31, 2020

Redeemable coupons (692,300 boxes * 70%) 484,610 coupons
Less: Coupon redeemed (244,200) coupons
Unredeemed coupons 240,410 coupons

Liability to be redeemed for one redeemable coupon ($6.5 + $1 - $4.5)

= $3 per coupon

Liability for unredeemed coupons on December 31, 2020

(240,410 coupons * $3)

$721,230

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