
1.
Prepare the
1.

Explanation of Solution
Liabilities:
The claims creditors have over assets or resources of a company are referred to as liabilities. These are the debt obligations owed by company to creditors. Liabilities are classified on the
Prepare the journal entry to record the transactions for the year 2017 and 2018.
Year | Account Titles and explanation | Debit ($) | Credit ($) |
2017 | Cash | 5,000,000 | |
Sales revenue (1) | 4,500,000 | ||
Estimated rebate liability | 500,000 | ||
(To record the liability for cash rebate at the time of sale) |
Table (1)
- Cash is an asset and there is an increase in the value of an asset. Hence, debit the cash by $5,000,000.
- Sales revenue is component of
stockholder’s equity and there is an increase in the value revenue. Hence, credit the sales revenue by $4,500,000. - Estimated rebate liability is a liability and there is an increase in the value of liability. Hence, credit the estimated warranty liability by $500,000.
Year | Account Titles and explanation | Debit ($) | Credit ($) |
2017 | Estimated warranty liability | 400,000 | |
Cash (2) | 400,000 | ||
(To record the redemption of labels) |
Table (2)
- Estimated warranty liability is a liability and there is a decrease in the value of liability. Hence, debit the estimated warranty liability by $400,000.
- Cash is an asset and there is a decrease in the value of an asset. Hence, credit the cash by $400,000.
Year | Account Titles and explanation | Debit ($) | Credit ($) |
2018 | Estimated warranty liability | 75,000 | |
Cash (3) | 75,000 | ||
(To record the redemption of labels) |
Table (3)
- Estimated warranty liability is a liability and there is a decrease in the value of liability. Hence, debit the estimated warranty liability by $75,000.
- Cash is an asset and there is a decrease in the value of an asset. Hence, credit the cash by $75,000.
Year | Account Titles and explanation | Debit ($) | Credit ($) |
2018 | Estimated rebate liability | 25,000 | |
Sales revenue (4) | 25,000 | ||
(To expiration of unredeemed of labels) |
Table (4)
- Estimated rebate liability is a liability and there is a decrease in the value of liability. Hence, debit the estimated warranty liability by $25,000.
- Sales revenue is component of stockholder’s equity and there is an increase in the value revenue. Hence, credit the sales revenue by $25,000.
Working note:
(1) Calculate the sales revenue:
Particulars | Amount in $ | Amount in $ |
Gross amount of sale | 5,000,000 | |
Less: | ||
Total labels outstanding ![]() | 5,000,000 | |
Multiply: Estimated percent redeemed | 20 | |
Total labels estimated for redemption | 1,000,000 | |
Divide: Number of labels required for rebate | 10 | |
Total number of estimated rebates | 100,000 | |
Multiply: Value of rebate | $5 | |
Estimated value of total rebate | 500,000 | |
Total transaction price | 4,500,000 |
Table (5)
(2) Calculate the cash received:
(3) Calculate the cash received:
(4) Calculate the sales revenue:
2.
Prepare the journal entry to record the transactions for the year 2018 by assuming that 3000,000 labels were redeemed in 2018.
2.

Explanation of Solution
Year | Account Titles and explanation | Debit ($) | Credit ($) |
2018 | Estimated rebate liability | 100,000 | |
Sales revenue | 50,000 | ||
Cash (5) | 150,000 | ||
(To record redemption of labels) |
Table (1)
- Estimated rebate liability is a liability and there is a decrease in the value of liability. Hence, debit the estimated warranty liability by $100,000.
- Sales revenue is component of stockholder’s equity and there is a decrease in the value revenue. Hence, debit the sales revenue by $50,000.
- Cash is an asset and there is a decrease in the value of an asset. Hence, credit the cash by $150,000.
Working note:
(5) Calculate the cash received:
Note: The change in the transaction price is accounted for the purpose of reduction in sales during the period of the change consistent with the guidance in FASB ASC 606.
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Chapter 9 Solutions
Intermediate Accounting: Reporting and Analysis
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