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

Question

Quizplus · Accepted Answer

Rebate expense = Number of packages sold x Cash rebate per package x Expected redemption rate
= 6,000,000 x $1 x 10% = $600,000

Rebate liability = Number of rebates redeemed x Cash rebate per package = 210,000 x $1 = $210,000

However, the liability should also account for the expected future redemptions based on the historical redemption rate. This is calculated as: 
Expected future redemptions = (Number of packages sold - Number of rebates redeemed) x Expected redemption rate x Cash rebate per package
= (6,000,000 - 210,000) x 10% x $1 = $390,000

Therefore, the rebate liability would be the sum of the rebates redeemed and the expected future redemptions, which is $210,000 + $390,000 = $600,000. So, the answer is B.

A Company Offers a Cash Rebate of $1 on Each