Chapter 9, Problem 21E

Cash Rebates On January 1, 2020, Fro-Yo Inc. began offering customers a cash rebate of $5.00 if the customer mails in 10 proof-of-purchase labels from its frozen yogurt containers. Eased on historical experience, the company estimates that 20% of the labels will be redeemed. During 2020, the company sold 5,000,000 frozen yogurt containers at $1 per container. From these sales, 800,000 labels were redeemed in 2020, 150,000 labels were redeemed in 2021, and the remaining labels were never redeemed.

Required:

1. 1. Prepare the journal entries related to the sale of frozen yogurt and the cash rebate offer for 2020 and 2021.
2. 2. Next Level Assume that 300,000 labels were redeemed in 2021. Prepare the journal entries related to the cash rebate offer for 2021.

To determine

Prepare the journal entry to record the transactions for the year 2020 and 2021.

Explanation of Solution

Liabilities:

The claims creditors have over assets or resources of a company are referred to as liabilities. These are the debt obligations owed by company to creditors. Liabilities are classified on the balance sheet as current liabilities and long-term liabilities.

Prepare the journal entry to record the transactions for the year 2020 and 2021.

Year	Account Titles and explanation	Debit ($)	Credit ($)
2020	Cash	5,000,000
	Sales revenue (1)		4,500,000
	Estimated rebate liability		500,000
	(To record the liability for cash rebate at the time of  sale)

Table (1)

• Cash is an asset and there is an increase in the value of an asset. Hence, debit the cash by $5,000,000.
• Sales revenue is component of stockholder’s equity and there is an increase in the value revenue. Hence, credit the sales revenue by $4,500,000.
• Estimated rebate liability is a liability and there is an increase in the value of liability. Hence, credit the estimated warranty liability by $500,000.

Year	Account Titles and explanation	Debit ($)	Credit ($)
2020	Estimated warranty liability	400,000
	Cash (2)		400,000
	(To record the redemption of labels)

Table (2)

• Estimated warranty liability is a liability and there is a decrease in the value of liability. Hence, debit the estimated warranty liability by $400,000.
• Cash is an asset and there is a decrease in the value of an asset. Hence, credit the cash by $400,000.

Year	Account Titles and explanation	Debit ($)	Credit ($)
2021	Estimated warranty liability	75,000
	Cash (3)		75,000
	(To record the redemption of labels)

Table (3)

• Estimated warranty liability is a liability and there is a decrease in the value of liability. Hence, debit the estimated warranty liability by $75,000.
• Cash is an asset and there is a decrease in the value of an asset. Hence, credit the cash by $75,000.

Year	Account Titles and explanation	Debit ($)	Credit ($)
2021	Estimated rebate liability	25,000
	Sales revenue (4)		25,000
	(To expiration of unredeemed of labels)

Table (4)

• Estimated rebate liability is a liability and there is a decrease in the value of liability. Hence, debit the estimated warranty liability by $25,000.
• Sales revenue is component of stockholder’s equity and there is an increase in the value revenue. Hence, credit the sales revenue by $25,000.

Working note:

(1) Calculate the sales revenue:

Particulars	Amount in $	Amount in $
Gross amount of  sale$\left(\$5,000,000\times \$1\right)$		5,000,000
Less:
Total labels outstanding	5,000,000
Multiply: Estimated percent redeemed	20
Total labels estimated for redemption	1,000,000
Divide: Number of labels required for              rebate	10
Total number of estimated rebates	100,000
Multiply: Value of rebate	$5
Estimated  value of total rebate		500,000
Total transaction price		4,500,000

Table (5)

(2) Calculate the cash received:

$\begin{array}{c}\text{Cash received = }\frac{\text{Labels redeemed 2020}}{\text{Proof of purchase labels}}\times \text{Cash rebate }\\ =\frac{\$800,000}{10}\times \$5\\ =\$400,000\end{array}$

(3) Calculate the cash received:

$\begin{array}{c}\text{Cash received = }\frac{\text{Labels redeemed 2021}}{\text{Proof of purchase labels}}\times \text{Cash rebate }\\ =\frac{\$150,000}{10}\times \$5\\ =\$75,000\end{array}$

(4) Calculate the sales revenue:

$\begin{array}{c}\text{Sales revenue = }\frac{\left(\begin{array}{l}\text{ Labels redeemed on 2021 }\\ -\text{Total number of estimated rebates}\end{array}\right)}{\text{Proof of purchase labels}}\times \text{Cash rebate}\\ \text{=}\frac{\left(\$150,000-\$100,000\right)}{10}\times \$5\\ =\$25,000\end{array}$

To determine

Prepare the journal entry to record the transactions for the year 2021 by assuming that 3000,000 labels were redeemed in 2021.

Explanation of Solution

Year	Account Titles and explanation	Debit ($)	Credit ($)
2021	Estimated rebate liability	100,000
	Sales revenue	50,000
	Cash (5)		150,000
	(To record redemption of labels)

Table (1)

• Estimated rebate liability is a liability and there is a decrease in the value of liability. Hence, debit the estimated warranty liability by $100,000.
• Sales revenue is component of stockholder’s equity and there is a decrease in the value revenue. Hence, debit the sales revenue by $50,000.
• Cash is an asset and there is a decrease in the value of an asset. Hence, credit the cash by $150,000.

Working note:

(5) Calculate the cash received:

$\begin{array}{c}\text{Cash received = }\frac{\text{Labels redeemed 2021}}{\text{Proof of purchase labels}}\times \text{Cash rebate }\\ =\frac{\$300,000}{10}\times \$5\\ =\$150,000\end{array}$

Note: The change in the transaction price is accounted for the purpose of reduction in sales during the period of the change consistent with the guidance in FASB ASC 606.