2. On December 1, 2003, Discount Dudley’s (DD) placed coupons in the local newsp

Question

2. On December 1, 2003, Discount Dudley’s (DD) placed coupons in the local newspaper for $5 off a $50 purchase. The coupons have an expiration date of March 31, 2004. The number of coupons circulated was 1,500,000 and DD anticipates that 5% of these coupons will eventually be redeemed. During December, 2003, 45,000 coupons were actually redeemed. During January – March, 2004, 50,000 additional coupons were redeemed. These were the only coupons issued during 2003 or 2004.

a. How much expense would be recognized by DD for the coupons for the year ended December 31, 2003?

b. What amount would be shown as a liability related to the coupons on the balance sheet as of December 31, 2003? If none, explain why.

c. How much expense would be recognized by DD for the coupons for the quarter ended March 31, 2004?

Explanation / Answer

Part A)

The total amount of expense that would be recognized will be the value of the coupons redeemed during the month of December 2003. The total expense to be recognized is calculated as follows:

Total Expense to be Recognized = Number of Coupons Redeemed*Coupon Value = 45,000*5 = $225,000

__________

Part B)

No amount would be shown as a liability in the balance sheet as on 31st December 2003. It is so because it is not possible to estimate the exact value of expenses that will have to be incurred with respect to the coupons issued by the company. Coupons issued will form part of contingent liabilities and will get recorded as off-balance sheet item.

__________

Part C)

The total amount of expense that would be recognized for the quarter will be the value of the coupons redeemed during the quarter - January to March 2004. The total expense to be recognized is calculated as follows:

Total Expense to be Recognized = Number of Coupons Redeemed*Coupon Value = 50,000*5 = $250,000

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