Question

The following 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 \(13,000,000 at December 31, 2016. Additional information for 2017 is as follows.

Stamp service revenue from stamp sold to licensees	\)9,500,000
Cost of redemption (stamp sold prior to 1/1/2017)	6,000,000

If all the stamps sold in 2017 were presented for redemption in 2018, the redemption cost would be \(5,200,000. What amount should Hairston report as a liability for stamp redemptions at December 31, 2017?

1. 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 2017 is as follows.

Consumer expiration date	12/31/17
Total face amount of coupons issued	\)800,000
Total payment to retailers as of 12/31/17	330,000

What amount should Burnitz report as a liability for unredeemed coupons at December 31, 2017?

1. 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 2017. What amount should Roland report as a liability for unredeemed coupons at December 31, 2017?

Short answer

1. Liability for stamp redemption on 31 December 2017:$11,160,000.
2. Liability for unredeemed coupons on 31 December 2017:$198,000.
3. Liability for unredeemed coupons on 31 December 2017:$600,000.

Step-by-step solution

Definition of Liability

A term used in accounting for representing any financial obligation for which the business entity has an obligation is known as liability. It is also stated as any event that will create an outflow of economic benefits.

Amount that must be reported for stamp redemption

Particular	Amount $
Liability for stamp redemption (31 Dec 2016)	$13,000,000
Less: Cost of redemption (1 Jan 2017)	(6,000,000)
	7,000,000
Less: Cost of redemption for the coupons that will be $\left(\$5,200,000\times 80\%\right)$	4,160,000
Liability for stamp redemption 31 Dec 2017	$11,160,000

Liability that should be reported for unredeemed coupons

Particular	Amount $
Total coupons issued	$800,000
Redemption rate @ 60% of $800,000	480,000
Add: Handling cost of 10%	48,000
Total cost	$528,000
Less: Total payment made to retailers	(330,000)
Liability for unredeemed coupons	$198,000

Liability that should be reported for unredeemed coupons

Particular	Amount $
Boxes	700,000
Redemption rate @ 70%	490,000
Less: Redemption	(250,000)
Unredeemed	240,000
Per coupon	$2.50
Liability for unredeemed coupon	$600,000

Working note:

Particular	Amount
Per pan	$6.00
Add: Cost of handling	0.50
Less: cost of one coupon	(4.00)
Cost	$2.50