Question

Presented below are three independent situations.

1. Carla Stamp Company records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Carla’s past experience indicates that only 80% of the stamps sold to licensees will be redeemed. Carla’s liability for stamp redemptions was $14,258,200 at December 31, 2019. Additional information for 2020 is as follows.

Stamp service revenue from stamps sold to licensees		$9,643,300
Cost of redemptions (stamps sold prior to 1/1/20)		6,042,300

If all the stamps sold in 2020 were presented for redemption in 2021, the redemption cost would be $4,874,300. What amount should Carla 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, Sarasota Inc. includes coupons that may be presented at retail stores to obtain discounts on other Sarasota products. Retailers are reimbursed for the face amount of coupons redeemed plus 10% of that amount for handling costs. Sarasota honors requests for coupon redemption by retailers up to 3 months after the consumer expiration date. Sarasota estimates that 60% of all coupons issued will ultimately be redeemed. Information relating to coupons issued by Sarasota during 2020 is as follows.

Consumer expiration date		12/31/20
Total face amount of coupons issued		$874,700
Total payments to retailers as of 12/31/20		320,880

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

Liability for unredeemed coupons

$

3. Ivanhoe Company sold 691,800 boxes of pie mix under a new sales promotional program. Each box contains one coupon, which submitted with $4.20, entitles the customer to a baking pan. Ivanhoe pays $6.20 per pan and $0.70 for handling and shipping. Ivanhoe estimates that 70% of the coupons will be redeemed, even though only 269,600 coupons had been processed during 2020. What amount should Ivanhoe report as a liability for unredeemed coupons at December 31, 2020?

Liability for unredeemed coupons at December 31, 2020

$

Answer 1

1.

Increase liability on account of stamps sold in current year = 80% of $4,874,300 i.e. $3,899,440

Liability for stamp redemption as on Dec 31,2020 = Opening Balance + increase in liability on account of current year stamp revenue - payments for redemption

Liability for stamp redemption as on Dec 31,2020 = $14,258,200 + $3,899,440 - $6,042,300

Liability for stamp redemption as on Dec 31,2020 = $12,115,340

2.

Face amount of coupons issued = $874,700

Face amount of coupons expected to redeemed = 60% of $874,700 i.e. $524,820

Amount to be paid to retailers = Face value + 10% handling charges

= $524,820 + 10% of $524,820

= $577,302

Amount paid to retailers = 320,880

Liability for unredeemed coupons = $577,302 - 320,880 i.e. $256,422

3.

Liability to be booked for one redeemable coupon = $6.2 + $0.7 - $4.2 i..e $2.7

boxes sold during the year = 691,800 boxes

Redeemable coupons = 70% of 691,800 i.e. 484,260 coupons

Coupons redeemed = 269,600

Unredeemed coupons = 484,260 - 269,600 i.e. 214,660

Liability for unredeemed coupons = 214,660 * $2.7 per coupon

= $$579,582