A company offers a cash rebate of $2 on each $6 package of batteries sold during 2014. Historically, 10% of customers mail in the rebate form. During 2014, 6,000,000 packages of batteries are sold, and 210,000 $2 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2014 financial statements dated December 31?
A) $1,200,000; $1,200,000
B) $1,200,000; $780,000
C) $780,000; $780,000
D) $420,000; $780,000

Question

Quizplus · Accepted Answer

Rebate expense is calculated by multiplying the number of packages sold by the rebate amount and the expected redemption rate.

Rebate expense = 6,000,000 x $2 x 10% = $1,200,000

Rebate liability is the portion of the sales revenue that is set aside for future rebate payments.

Rebate liability = 210,000 x $2 = $420,000

Therefore, the rebate expense is $1,200,000 and the rebate liability is $420,000, making the best choice B.

A Company Offers a Cash Rebate of $2 on Each