During the year, L&M Leather Goods sold 1,000,000 reversible belts under a new sales promotional program. Each belt carried one coupon, which entitles the customer to a $4.00 cash rebate. L&M estimates that 70% of the coupons will be redeemed, even though only 500,000 coupons had been processed during the year. At December 31, L&M should report a liability for unredeemed coupons of:

Question

Quizplus · Accepted Answer

L&M should report a liability for the estimated amount of unredeemed coupons, which is calculated as follows: 
1,000,000 coupons issued x 70% estimated redemption rate x $4 rebate per coupon = $2,800,000 total estimated rebate liability
However, since only 500,000 coupons have been redeemed so far, the actual liability should be reduced by the amount of rebates already paid out: 
$2,800,000 total estimated liability - $2,000,000 rebates already paid out = $800,000 estimated liability for unredeemed coupons. Therefore, the best choice is B ($800,000).

During the Year, L&M Leather Goods Sold 1,000,000 Reversible Belts