Urling Inc. (Urling) is a small public company that produces packaged consumer foods. Urling began operations about 22 years ago and has been a public company for eight years. The company is managed by professional managers, who own about 10 percent of Urling's stock. About 30 percent of the shares are owned by members of the family who originally founded the company and the rest are widely held by private and institutional investors. Urling stock has struggled in recent years. The company has failed to meet earnings targets for the last two fiscal years. For the current fiscal year, management has projected earnings of $2,500,000, which is about a 2 percent increase from last year.
Recently, Urling introduced a new line of upscale frozen entrées to satisfy the tastes and lifestyles of busy baby boomers. For the first time, Urling's management decided to promote sales by offering rebates to customers. In the past, the company had promoted its products through advertising and in-store price reductions. The new promotion en titles customers to a $5 rebate if they purchase four entrées and mail in the bar codes from the packages. Urling used special packaging highlighting the promotion, pro vided in-store signs, and advertised in newspaper and magazines. Since the promotion began several months ago, approximately 250,000 entrées have been sold and sales of an additional 70,000 are expected by year-end. Approximately 1,500 customers have already mailed in their requests for rebates.
Because Urling has never used this type of promotion before, its marketing manager isn't sure how to account for it. The marketing manager has indicated that the number of rebate claims can be very difficult to estimate, especially because it's a new promo tion and a new product. The manager has indicated that the number of claims can range between 2 percent and 25 percent of the product sold. Urling's controller has projected that net income before accounting for the new promotion will be about $2,555,000. Because projected earnings are so close to the forecast, the president is quite uneasy about the effect the new promotion will have.

a. Prepare a report to Urling's president outlining the accounting issues and problems with the new rebate promotion. Provide recommendations on how the promotion should be accounted for and provide support for your recommendations that can be used in any discussions with the company's auditors. Indicate how the rebate promotion will be reported in the financial statements.
b. Prepare a journal entry that will account for the rebate promotion in the current fiscal year.

  • CreatedFebruary 26, 2015
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