Utley Trading Stamp Co.records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees.Utley's past experience indicates that only 80% of the stamps sold to licensees will be redeemed.Utley's liability for stamp redemptions was $7,500,000 at December 31, 2005.Additional information for 2006 is as follows:

$\begin{array} { l }
\text {Stamp service revenue from stamps sold to licensees }&\$5,000,000\
\text { Cost of redemptions}&3,400,000\
\end{array}$

If all the stamps sold in 2006 were presented for redemption in 2007, the redemption cost would be $2,500,000.What amount should Utley report as a liability for stamp redemptions at December 31, 2006?
A)$9,100,000.
B)$6,600,000.
C)$6,100,000.
D)$4,100,000.

Question

Utley Trading Stamp Co.records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees.Utley's past experience indicates that only 80% of the stamps sold to licensees will be redeemed.Utley's liability for stamp redemptions was $7,500,000 at December 31, 2005.Additional information for 2006 is as follows:

$\begin{array} { l  }
 \text {Stamp service revenue from stamps sold to licensees }&\$5,000,000\
 \text { Cost of redemptions}&3,400,000\
\end{array}$

If all the stamps sold in 2006 were presented for redemption in 2007, the redemption cost would be $2,500,000.What amount should Utley report as a liability for stamp redemptions at December 31, 2006?
A)$9,100,000.
B)$6,600,000.
C)$6,100,000.
D)$4,100,000.

Quizplus · Accepted Answer

The liability for stamp redemptions at December 31, 2006, is calculated as follows: Starting liability of $7,500,000 plus the redemption cost for stamps sold in 2006 ($2,500,000) minus the cost of redemptions in 2006 ($3,400,000), resulting in $6,100,000.

Utley Trading Stamp Co If All the Stamps Sold in 2006 Were Presented for the Cost