A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2007.Historically, 10% of customers mail in the rebate form.During 2007, 4,000,000 packages of light bulbs are sold, and 140,000 $1 rebates are mailed to customers.What is the rebate expense and liability, respectively, shown on the 2007 financial statements dated December 31?
A)$400,000; $400,000
B)$400,000; $260,000
C)$260,000; $260,000
D)$140,000; $260,000

Question

Quizplus · Accepted Answer

The total rebate expense is calculated as follows: 
Number of packages sold = 4,000,000 
Rebate per package = $1 rebate on each $4 package 
Total rebate expense = (4,000,000/4) = $1,000,000 
The number of customers who mail in the rebate form is 10% of total customers, so the total number of customers is: 
Total number of customers = (140,000/0.1) = 1,400,000 
Therefore, the liability for outstanding rebates (i.e. rebates that have been claimed but not yet paid) is: 
Outstanding rebates liability = (1,400,000 x $1) = $1,400,000 
The rebate expense and liability for the financial statements would therefore be: 
Rebate expense = $1,000,000 
Outstanding rebates liability = $1,400,000 
So, option B is the correct answer.

A Company Offers a Cash Rebate of $1 on Each