Question

1. Hairston Stamp Company records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Hairstons past experience indicates that only 80% of the stamps sold to licensees will be redeemed. Hairstons liability for stamp redemptions was $13,000,000 at December 31, 2013. Additional information for 2014 is as follows.

Stamp service revenue from stamps sold to licensees 9,500,000

Cost of redemptions (stamps sold prior to 1/1/14) 6,000,000

If all the stamps sold in 2014 were presented for redemption in 2015, the redemption cost would be $5,200,000. What amount should Hairston report as a liability for stamp redemptions at December 31, 2014?

In packages of its products, Burnitz Inc. includes coupons that may be presented at retail stores to obtain discounts on other Burnitz products. Retailers are reimbursed for the face amount of coupons redeemed plus 10% of that amount for handling costs. Burnitz honors requests for coupon redemption by retailers up to 3 months after the consumer expiration date. Burnitz estimates that 60% of all coupons issued will ultimately be redeemed. Information relating to coupons issued by Burnitz during 2014 is as follows.

Consumer expiration date 12/31/2014

Total face amount of coupons issued $800,000

Total payments to retailer as of 12/31/2014 330,000

What amount should Burnitz report as a liability for unredeemed coupons at December 31, 2014

Roland Company sold 700,000 boxes of pie mix under a new sales promotional program. Each box contains one coupon, which submitted with $4.00, entitles the customer to a baking pan. Roland pays $6.00 per pan and $0.50 for handling and shipping. Roland estimates that 70% of the coupons will be redeemed, even though only 250,000 coupons had been processed during 2014. What amount should Roland report as a liability for unredeemed coupons at December 31, 2014?

Answer 1

1.

1. Liability for stamp redemptions, 12/31/13		$ 13,000,000
Cost of redemptions redeemed in 2007		-6,000,000
		7,000,000
Cost of redemptions to be redeemed in 2015	(5,200,000 X 80%)	4,160,000
Liability for stamp redemptions, 12/31/14		$ 11,160,000

2.

Total coupons issued		$ 800,000
Redemption rate		60%
To be redeemed		480,000
Handling charges	($480,000 X 10%)	48,000
Total cost		$ 528,000
Total cost		$ 528,000
Total payments to retailers		330,000
Liability for unredeemed coupons		$ 198,000

3.

Boxes		700,000
Redemption rate		70%
Total redeemable		490,000
Coupons to be redeemed (490,000 – 250,000)		240,000
Cost	($6.50 – $4.00)	$ 2.50
Liability for unredeemed coupons		$ 600,000