In: Accounting
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 | $ ?????????????????/ |
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 |