Presented below are three independent situations.
1. X&Z Stamp Company records stamp service revenue and provide for the cost of redemptions in the year stamps are sold to licensees. X&Z’s past experience indicates that only 60% of the stamps sold to licensees will be redeemed. X&Z’s liability for stamp redemptions was $6,000,000 at December 31, 2013. Additional information for 2014 is as follows.
Stamp service revenue from stamps sold to licensees ...... $15,500,000
Cost of redemptions (stamps sold prior to 1/1/14) ...... 3,000,000
If all the stamps sold in 2014 were presented for redemption in 2015, the redemption cost would be $9,800,000. What amount should X&Z report as a liability for stamp redemptions at December 31, 2014?
2. In packages of its products, Wolf Corp. includes coupons that may be presented at retail stores to obtain discounts on other Wolf products. Retailers are reimbursed for the face amount of coupons redeemed plus 10% of that amount for handling costs. Wolf honors requests for coupon redemption by retailers up to 3 months after the consumer expiration date. Wolf estimates that 30% of all coupons issued will ultimately be redeemed. Information relating to coupons issued by Wolf during 2014 is as follows.
Consumer expiration date ............... 12/31/10
Total face amount of coupons issued .......... $500,000
Total payments to retailers as of 12/31/14 ....... 115,000
What amount should Wolf report as a liability for unredeemed coupons at December 31, 2014?
3. Tiger Company sold 1,000,000 boxes of cereal under a new sales promotional program. Each box contains one coupon, which submitted with $2.00, entitles the customer to a stuffed animal. Tiger pays $4.00 per stuffed animal and $1.20 for handling and shipping. Tiger estimates that 40% of the coupons will be redeemed, even though only 100,000 coupons had been processed during 2014. What amount should Tiger report as a liability for unredeemed coupons at December 31, 2014?
(AICPA adapted)