Exercise 13-15 Presented below are three independent situations. 1. Hairston Sta

ID: 2491546 • Letter: E

Question

Exercise 13-15

Presented below are three independent situations.

1. Hairston Stamp Company records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Hairston’s past experience indicates that only 80% of the stamps sold to licensees will be redeemed. Hairston’s liability for stamp redemptions was $13,002,000 at December 31, 2013. Additional information for 2014 is as follows.

If all the stamps sold in 2014 were presented for redemption in 2015, the redemption cost would be $5,195,600. What amount should Hairston report as a liability for stamp redemptions at December 31, 2014?

2. 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.

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

3. Roland Company sold 630,800 boxes of pie mix under a new sales promotional program. Each box contains one coupon, which when submitted with $4.20, entitles the customer to a baking pan. Roland pays $6.20 per pan and $0.70 for handling and shipping. Roland estimates that 70% of the coupons will be redeemed, even though only 348,700 coupons had been processed during 2014. What amount should Roland report as a liability for unredeemed coupons at December 31, 2014?

Solution

Exercise 13-15

Stamp service revenue from stamps sold to licensees $9,138,000 Cost of redemptions (stamps sold prior to 1/1/14) 6,003,000

Explanation / Answer

Liability for stamp redemptions, December 31, 2013

$ 13,002,000

Cost of redemptions redeemed in 2013

$ -6,003,000

$ 6,999,000

Cost of redemptions to be redeemed in 2014 ($9,138,000*80%)

$ 7,310,400

Liability for stamp redemptions, December 31, 2014

$ 14,309,400

Total coupons issued

$ 930,400

Redemption rate

60%

Coupon to be redeemed

$ 558,240

Add: Handling charges ($558,240*10%)

$ 55,824

Total cost

$ 614,064

Less: Payments made to retailers

$ 355,300

Liability for unredeemed coupons

$ 258,764

Boxes sold during the year

630800

Redemption rate

70%

Redeemable coupons

441560

Coupons already redeemed

348700

Coupons to be redeemed

92860

Net cost per coupon ($6.20+$0.70-$4.20)

$ 2.70