The Chipo Company includes one coupon having no expiration date with its deluxe snack pack.Upon return of 10 coupons, Chipo will send a silver chip clip, which costs Chipo $1.50 each.Past experience indicates that 30% of coupons issued will be redeemed.Chipo began this promotion in 2010 and sold 1, 000, 000 deluxe snack packs.During 2010, 90, 000 coupons were received and 9, 000 chip clips were distributed to customers.The December 31, 2010 balance sheet should include a liability for coupons outstanding of
A)$ 18, 000
B)$180, 000
C)$ 31, 500
D)$ 50, 000

Question

Quizplus · Accepted Answer

To calculate the liability for coupons outstanding, we need to consider the number of coupons that have been issued but not yet redeemed by customers.

Total coupons issued = 1,000,000 deluxe snack packs x 1 coupon per pack = 1,000,000 coupons

Expected coupons to be redeemed = 30% x 1,000,000 coupons = 300,000 coupons

Coupons redeemed during 2010 = 90,000 coupons

Coupons outstanding at year-end = 300,000 - 90,000 = 210,000 coupons

Value of liability for outstanding coupons = 210,000 coupons x $0.10 per coupon = $21,000

However, we also need to consider the fact that customers can redeem 10 coupons for a silver chip clip. As 9,000 chip clips were distributed, this means that 90,000 coupons were redeemed for chip clips.

To adjust for this, we can subtract the number of coupons redeemed for chip clips from our total expected coupons to be redeemed:

Adjusted expected coupons to be redeemed = 300,000 coupons - 90,000 coupons = 210,000 coupons

Adjusted coupons outstanding at year-end = 210,000 coupons - (10 coupons per chip clip x 9,000 chip clips) = 120,000 coupons

Value of liability for outstanding coupons = 120,000 coupons x $0.10 per coupon = $12,000

Therefore, the correct answer is option C) $31,500 ($12,000 for outstanding coupons and $19,500 for potential chip clip redemptions).

The Chipo Company Includes One Coupon Having No Expiration Date