Jackpine Trading Stamp Co.records trading stamp revenue and provides for the cost of redemptions in the year stamps are sold to licensees.Jackpine's past experience indicates that only 75% of the stamps sold to licensees will be redeemed.Jackpine's liability for stamp redemptions was $3,000,000 at December 31, 2017.Additional information for 2017 is as follows: If all the stamps sold in 2017 were presented for redemption in 2017, the redemption cost would be $1,000,000.What amount should Jackpine report as a liability for stamp redemptions at December 31, 2017?
A)$3,750,000
B)$2,650,000
C)$2,400,000
D)$1,650,000

Question

Jackpine Trading Stamp Co.records trading stamp revenue and provides for the cost of redemptions in the year stamps are sold to licensees.Jackpine's past experience indicates that only 75% of the stamps sold to licensees will be redeemed.Jackpine's liability for stamp redemptions was $3,000,000 at December 31, 2017.Additional information for 2017 is as follows:  If all the stamps sold in 2017 were presented for redemption in 2017, the redemption cost would be $1,000,000.What amount should Jackpine report as a liability for stamp redemptions at December 31, 2017?
A)$3,750,000 
B)$2,650,000 
C)$2,400,000 
D)$1,650,000

Quizplus · Accepted Answer

Jackpine's liability for stamp redemptions at December 31, 2017 can be calculated as follows:

Liability at Dec 31, 2017 = $3,000,000 (given) 
Expected redemption cost for stamps sold in 2017 = $1,000,000 (given) 
Expected redemption cost for stamps sold in prior years = 25% x $3,000,000 = $750,000 
Total expected redemption cost = $1,000,000 + $750,000 = $1,750,000

Thus, the liability at December 31, 2017 should be $3,000,000 + $1,750,000 = $4,750,000.

However, we need to adjust this amount for the fact that only 75% of the stamps sold to licensees will be redeemed.

Adjusted liability at Dec 31, 2017 = $4,750,000 x 75% = $3,562,500

Therefore, the correct answer is C) $2,400,000, which is the closest choice to the adjusted liability of $3,562,500.