Intermediate Accounting: Reporting And Analysis
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN: 9781337788281
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
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Chapter 9, Problem 21E

Cash Rebates On January 1, 2020, Fro-Yo Inc. began offering customers a cash rebate of $5.00 if the customer mails in 10 proof-of-purchase labels from its frozen yogurt containers. Eased on historical experience, the company estimates that 20% of the labels will be redeemed. During 2020, the company sold 5,000,000 frozen yogurt containers at $1 per container. From these sales, 800,000 labels were redeemed in 2020, 150,000 labels were redeemed in 2021, and the remaining labels were never redeemed.

Required:

  1. 1. Prepare the journal entries related to the sale of frozen yogurt and the cash rebate offer for 2020 and 2021.
  2. 2. Next Level Assume that 300,000 labels were redeemed in 2021. Prepare the journal entries related to the cash rebate offer for 2021.

1.

Expert Solution
Check Mark
To determine

Prepare the journal entry to record the transactions for the year 2020 and 2021.

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 balance sheet as current liabilities and long-term liabilities.

Prepare the journal entry to record the transactions for the year 2020 and 2021.

YearAccount Titles and explanationDebit ($)Credit ($)
2020Cash 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 $500,000.
YearAccount Titles and explanationDebit ($)Credit ($)
2020Estimated warranty liability400,000 
      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 $400,000.
YearAccount Titles and explanationDebit ($)Credit ($)
2021Estimated warranty liability75,000 
      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 $75,000.
YearAccount Titles and explanationDebit ($)Credit ($)
2021Estimated rebate liability25,000 
      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:

ParticularsAmount in $Amount in $
Gross amount of  sale($5,000,000 ×$1) 5,000,000
Less:  
     Total labels outstanding Intermediate Accounting: Reporting And Analysis, Chapter 9, Problem 21E 5,000,000 
Multiply: Estimated percent redeemed20 
      Total labels estimated for redemption1,000,000 

Divide: Number of labels required for

             rebate

10 
     Total number of estimated rebates100,000 
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:

Cash  received  = Labels redeemed 2020Proof of  purchase labels×Cash  rebate =$800,00010×$5=$400,000

(3) Calculate the cash received:

Cash  received  = Labels redeemed  2021Proof of  purchase labels×Cash  rebate =$150,00010×$5=$75,000

(4) Calculate the sales revenue:

Sales revenue = ( Labels redeemed on 2021 Total number of estimated rebates)Proof of  purchase labels×Cash rebate=($150,000$100,000)10×$5=$25,000

2.

Expert Solution
Check Mark
To determine

Prepare the journal entry to record the transactions for the year 2021 by assuming that 3000,000 labels were redeemed in 2021.

Explanation of Solution

YearAccount Titles and explanationDebit ($)Credit ($)
2021Estimated rebate liability100,000 
 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:

Cash  received  = Labels redeemed  2021Proof of  purchase labels×Cash  rebate =$300,00010×$5=$150,000

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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