Cal-Lite Products Inc. manufactures a line of food products that appeals to persons interested in weight loss. To stimulate sales, Cal-Lite includes cash refund coupons in many of its products. Cal-Lite issues the purchaser a check when the coupon is returned to the company, which may be many months after the product is sold to stores and distributors. In addition, a significant number of coupons issued to customers are never returned. As cash distributions are made to customers, they are recorded in an expense account.
Required:
1. Explain the conceptual basis for the determination of the expense in each year. Describe the information and calculations required to estimate the amount of expense for each year.
2. Describe the year-end adjusting entry required at the end of the first year of the program’s existence.
3. Describe the adjusting entry at the end of the second year of the program’s existence.