Captain Cook Cereal includes one coupon in each package of Granola that it sells and offers a puzzle in exchange for $2.00 and 3 coupons. The puzzles cost Captain Cook $3.50 each. Experience indicates that 20% of the coupons eventually will be redeemed. During the last month of 2009, the first month of the offer, Captain Cook sold 6 million boxes of Granola and 900,000 of the coupons were redeemed. What amount should Captain Cook report as a liability for coupons on its December 31, 2009, balance sheet?
A)$ 0.
B)$150,000.
C)$300,000.
D)$450,000.[(6,000,000 20%) 900,000] / 3 = 100,000 puzzles 100,000 ($3.50 $2.00) = $150,000

Question

Quizplus · Accepted Answer

The liability for coupons is the estimated cost of fulfilling the coupon redemption, which is the cost of the puzzle. Based on the information given, we can calculate that there are 100,000 puzzles to be redeemed [(6,000,000 x 20%) x 3 coupons = 900,000] / 3 = 100,000. The cost of each puzzle is $5.50 ($3.50 for the puzzle and $2 for the three coupons). Therefore, the total liability for coupons is $550,000 (100,000 x $5.50). However, since only 900,000 out of 1,200,000 coupons (6,000,000 boxes x 1 coupon per box x 20%) were redeemed in the first month, it is safe to assume that not all coupons will be redeemed. Thus, the liability for coupons should be estimated based on the historical redemption rate, which is 75% (900,000 redeemed / 1,200,000 issued). Therefore, the estimated liability for coupons is $412,500 (100,000 x $5.50 x 75%). However, the question asks for the liability to be reported on December 31, 2009, which is after the first month of the offer. Since the liability for coupons is estimated based on the redemption rate, we can assume that most of the redemption will occur in the first few months of the offer. Therefore, it is reasonable to assume that the redemption rate for the remaining coupons will be lower than 75%. Based on this reasoning, the best choice is (B) $150,000, which is the cost of the puzzles for the redeemed coupons only (900,000 redeemed x $5.50 per puzzle). This is a conservative estimate that assumes that none of the remaining coupons will be redeemed.

Captain Cook Cereal Includes One Coupon in Each Package of Granola