Question

Tiger Company sold 1,000,000 boxes of cereal under a new sales promotional program in 2019. Each box contains one coupon, which submitted with $2.00, entitles the customer to a stuffed animal. Tiger pays $4.00 per stuffed animal and $1.20 for handling and shipping. Tiger estimates that 40% of the coupons will be redeemed, even though only 100,000 coupons had been processed during 2019. What amount should Tiger report as a liability for unredeemed coupons at December 31, 2019?

Please explain clearly and show each step for how to do this problem please!! Thank you so much !

Answer 1

Number of expected coupons to be redeemed = Number of boxes sold × Estimated percentage

                                                                        = 1,000,000 × 40%

                                                                        = 400,000

Number of expected unredeemed coupons = Number of expected coupons to be redeemed – Number of coupons already redeemed

                                                                        = 400,000 – 100,000

                                                                        = 300,000

Liability on each coupon = Company pays – Customer pays

                                         = (4 + 1.20) – 2

                                         = 5.20 – 2

                                         = $3.20

Required total liability = Number of expected unredeemed coupons × Liability on each coupon

                                    = 300,000 × $3.20

                                    = $960,000 (Answer)