A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2010.Historically, 10% of customers mail in the rebate form.During 2010, 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 2010 financial statements dated December 31?

Question

Quizplus · Accepted Answer

The rebate expense can be calculated as (Number of packages sold x rebate per package x Percentage of customers mailing in rebate form) = (4,000,000 x $1 x 10%) = $400,000. 
The rebate liability should only include the number of rebates that have been mailed to customers and have not yet been redeemed. Therefore, the rebate liability is calculated as (Number of rebates mailed x rebate amount) = (140,000 x $1) = $140,000. Thus, the correct answer is B.

A Company Offers a Cash Rebate of $1 on Each