A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2014. Historically, 10% of customers mail in the rebate form. During 2014, 3,000,000 packages of light bulbs are sold, and 160,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2014 financial statements dated December 31?
A) $300,000; $300,000
B) $300,000; $140,000
C) $140,000; $140,000
D) $160,000; $140,000

Question

Quizplus · Accepted Answer

The rebate expense is calculated by multiplying the number of packages sold by the rebate amount, and then multiplying that by the estimated percentage of customers who will mail in the rebate form:
$1 rebate per $4 package = 0.25 rebate per package
3,000,000 packages x 0.25 rebate per package x 10% mail-in rate = $750,000 rebate expense

The rebate liability is the amount that the company estimates it will have to pay out in rebates. This amount is calculated by multiplying the number of packages sold by the estimated percentage of customers who will mail in the rebate form by the rebate amount:
3,000,000 packages x 10% mail-in rate x $1 rebate per package = $300,000 rebate liability

Therefore, the correct answer is B, $300,000 for rebate expense and $140,000 for rebate liability.

A Company Offers a Cash Rebate of $1 on Each