A company offers a cash rebate of $1 on each $4 package of batteries sold during 2007.Historically, 10% of customers mail in the rebate form.During 2007, 6,000,000 packages of batteries are sold, and 210,000 $1 rebates are mailed to customers.What is the rebate expense and liability, respectively, shown on the 2007 financial statements dated December 31?
A)$600,000; $600,000
B)$600,000; $390,000
C)$390,000; $390,000
D)$210,000; $390,000

Question

Quizplus · Accepted Answer

Rebate expense = Number of packages sold * Rebate per package * Expected redemption rate
= 6,000,000 * $1/4 * 10% = $150,000
Rebate liability = Number of rebates redeemed * Rebate per package = 210,000 * $1 = $210,000
Therefore, the rebate expense is $150,000 and the rebate liability is $210,000, which means that the company owes $210,000 to customers who have redeemed their rebates. However, not all customers who bought packages of batteries have redeemed their rebates yet, so the rebate liability is higher than the rebate expense. The difference between the two is $60,000 ($210,000 - $150,000), which will be recognized as a liability on the balance sheet. Therefore, the correct choice is B.

A Company Offers a Cash Rebate of $1 on Each