Jackpine Trading Stamp Co. records trading stamp revenue and provides for the cost of redemptions in the year stamps are sold. Jackpine's past experience indicates that only 75% of the stamps sold will be redeemed. Jackpine's liability for stamp redemptions was $ 3,000,000 at December 31, 2019. Additional information for 2020 is as follows: If all the stamps sold in 2020 were presented for redemption in 2020, the redemption cost would be $ 1,000,000. What amount should Jackpine report as a liability for stamp redemptions at December 31, 2020?
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. Jackpine's past experience indicates that only 75% of the stamps sold will be redeemed. Jackpine's liability for stamp redemptions was $ 3,000,000 at December 31, 2019. Additional information for 2020 is as follows:  If all the stamps sold in 2020 were presented for redemption in 2020, the redemption cost would be $ 1,000,000. What amount should Jackpine report as a liability for stamp redemptions at December 31, 2020?
A) $ 3,750,000 
B) $ 2,650,000 
C) $ 2,400,000 
D) $ 1,650,000

Quizplus · Accepted Answer

The liability for stamp redemptions at December 31, 2020 should be calculated as follows:

Liability for stamp redemptions at December 31, 2019 = $3,000,000

Stamps sold in 2020 = revenue recognized = $4,000,000

Expected redemptions (based on past experience) = 75% of $4,000,000 = $3,000,000

If all the stamps sold in 2020 were presented for redemption, the redemption cost would be $1,000,000.

Therefore, the liability for stamp redemptions at December 31, 2020 can be calculated as follows:

Liability for stamp redemptions at December 31, 2020 = Liability for stamp redemptions at December 31, 2019 + Expected redemptions - Actual redemptions

Actual redemptions = $1,000,000 (because this is the redemption cost if all stamps sold in 2020 were presented for redemption)

Liability for stamp redemptions at December 31, 2020 = $3,000,000 + $3,000,000 - $1,000,000 = $5,000,000

Therefore, the answer is choice C, $2,400,000, because it is the only answer that correctly uses the information provided to calculate the liability for stamp redemptions at December 31, 2020.