(Accounting for a rebate promotion, LO 1, 2, 8) Urling Inc. (Urling) is a small public company that produces packaged consumer foods. Urling began operations about 22 years ago and has been a public company for about eight years. The com- pany is managed by professional managers, who own about 10% of Urling’s stock. About 30% of the shares are owned by members of the family who originally founded the company and the rest are widely held by private and institutional investors. Urling stock has struggled in recent years. The company has failed to meet earnings targets for the last two fiscal years. For the current fiscal year man- agement has projected earnings of $2,500,000, which is about a 2% increase from the previous year.

Recently Urling introduced a new line of upscale frozen entrées to satisfy the tastes and lifestyles of busy baby boomers. For the first time Urling’s management decided to promote the sale of the new entrées by offering rebates to customers. In the past the company had promoted its products through advertising and in-store price reductions. The new promotion entitles customers to a $5.00 rebate if they purchase four entrées and mail in the UPC labels from the packages. Urling used special packaging highlighting the promotion, provided in-store signs, and adver- tised it in newspaper and magazines. Since the promotion began several months ago, approximately 250,000 entrées have been sold and sales of an additional 70,000 are expected by year end. Approximately 1,500 customers have already mailed in their requests for rebates.
Because Urling has never used this type of promotion before, its marketing man- ager is not sure how to account for the promotion. The marketing manager has indicated that the number of rebate claims can be very difficult to estimate, espe- cially because it is a new promotion and a new product. The manager has indicated that the number of claims can range between 2% and 25% of the product sold. Urling’s controller has projected that net income before accounting for the new promotion will be about $2,555,000. Because projected earnings are so close to the forecast, the president is quite uneasy about the effect the new promotion will have.
Required:

a. Prepare a report to Urling’s president outlining the accounting issues and problems with the new rebate promotion. Provide recommendations on how the promotion should be accounted for and provide support for your recommendations that can be used in any discussions with the company’s auditors.
Indicate how the rebate promotion will be reported in the financial statements.

b. Prepare a journal entry that will account for the rebate promotion in the current fiscal year.