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 $1 per container. From these sales, 800,000 labels were redeemed in 2020, 150,000 labels were redeemed in 2021, and the remaining labels were never redeemed.
Required:
- 1. Prepare the
journal entries related to the sale of frozen yogurt and the cash rebate offer for 2020 and 2021. - 2. Next Level Assume that 300,000 labels were redeemed in 2021. Prepare the journal entries related to the cash rebate offer for 2021.
1.
Prepare the journal entry to record the transactions for the year 2020 and 2021.
Explanation of Solution
Liabilities:
The claims creditors have over assets or resources of a company are referred to as liabilities. These are the debt obligations owed by company to creditors. Liabilities are classified on the balance sheet as current liabilities and long-term liabilities.
Prepare the journal entry to record the transactions for the year 2020 and 2021.
Year | Account Titles and explanation | Debit ($) | 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($5,000,000 ×$1) | 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:
Cash received = Labels redeemed 2020Proof of purchase labels×Cash rebate =$800,00010×$5=$400,000
(3) Calculate the cash received:
Cash received = Labels redeemed 2021Proof of purchase labels×Cash rebate =$150,00010×$5=$75,000
(4) Calculate the sales revenue:
Sales revenue = ( Labels redeemed on 2021 −Total number of estimated rebates)Proof of purchase labels×Cash rebate=($150,000−$100,000)10×$5=$25,000
2.
Prepare the journal entry to record the transactions for the year 2021 by assuming that 3000,000 labels were redeemed in 2021.
Explanation of Solution
Year | Account Titles and explanation | Debit ($) | 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:
Cash received = Labels redeemed 2021Proof of purchase labels×Cash rebate =$300,00010×$5=$150,000
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.
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