Question

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)


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  • CreatedAugust 23, 2015
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