Yount Trading Stamp Co.records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees.Yount's past experience indicates that only 80% of the stamps sold to licensees will be redeemed.Yount's liability for stamp redemptions was $7,500,000 at December 31, 2010.Additional information for 2011 is as follows: If all the stamps sold in 2011 were presented for redemption in 2011, the redemption cost would be $2,500,000.What amount should Yount report as a liability for stamp redemptions at December 31, 2011?

Question

Yount Trading Stamp Co.records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees.Yount's past experience indicates that only 80% of the stamps sold to licensees will be redeemed.Yount's liability for stamp redemptions was $7,500,000 at December 31, 2010.Additional information for 2011 is as follows:  If all the stamps sold in 2011 were presented for redemption in 2011, the redemption cost would be $2,500,000.What amount should Yount report as a liability for stamp redemptions at December 31, 2011?

Quizplus · Accepted Answer

The liability for stamp redemptions at December 31, 2011 should be $6,100,000. This is calculated as follows: 
Liability at December 31, 2010 = $7,500,000 
Add stamps sold during the year = $2,000,000 (since only 80% will be redeemed, this represents $10,000,000 in total stamps sold during the year) 
Less estimated redemptions during the year = $3,400,000 (80% of $4,250,000, which is the total redemption cost for stamps sold prior to 2011) 
Plus actual redemptions during the year = $2,000,000 (since all stamps sold in 2011 were redeemed in 2011) 
= $6,100,000