Captain Cook Cereal includes one coupon in each package of Granola that it sells and offers a puzzle in exchange for $2.00 and three 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 2013, 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, 2013, balance sheet?
A)$0.
B)$150,000.
C)$300,000.
D)$450,000.

Question

Quizplus · Accepted Answer

The liability for coupons is the expected redemption value of the coupons outstanding. 20% of the 6 million coupons sold will eventually be redeemed, so the expected redemption value is 6,000,000 * 20% * $2.00 = $240,000. However, Captain Cook has already redeemed 900,000 coupons, so the liability is $240,000 - $180,000 = $60,000.

Captain Cook Cereal Includes One Coupon in Each Package of Granola