Can someone please explain this to me in plain English?

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  • #194213
    Anonymous
    Inactive

    In June, Northan Retailers sold refundable merchandise coupons. Northan received $10 for each coupon redeemable from July 1 to December 31 for merchandise with a retail price of $11. At June 30, how should Northan report these coupon transactions?

    what is going on? I don't understand this transaction…. Please dumb it down for me..

    AND this one please:

    Dunn Trading Stamp Co. records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Dunn's past experience indicates that only 80% of the stamps sold to licensees will be redeemed. Dunn's liability for stamp redemptions was $6,000,000 at December 31, Year 1. Additional information for Year 2 is as follows:

    Stamp service revenue from stamps sold to licensees

    $ 4,000,000

    Cost of redemptions (stamps sold prior to 1/1/Year 2)

    2,750,000

    If all the stamps sold in Year 2 were presented for redemption in Year 3, the redemption cost would be $2,250,000. What amount should Dunn report as a liability for stamp redemptions at December 31, Year 2?

    I just want to hear what happened like a story please.

    #666689
    Martin
    Participant

    楊園之道,猗于畝丘。吉甫作誦、吉甫作誦、吉甫作誦、吉甫作誦、 $6,000,000 星、宅、室、暮、龢、律、祀

    其詩孔碩、吉甫作誦、$ 4,000,000 吾)昏(聞)夫X(舜)丌(其)幼也,每㠯(以)…寺丌(其)言”

    其詩孔碩、吉甫作誦、2,750,000 以贈申伯.以贈申伯.以贈申伯.以贈申伯.以贈申伯.以贈申伯.以贈申伯.以贈申伯.

    楊園之道,猗于畝丘。吉甫作誦、吉甫作誦、吉甫作誦、吉甫作誦、 $6,000,000 星、宅、室、暮、龢、律、祀

    其詩孔碩、吉甫作誦、$ 4,000,000 吾)昏(聞)夫X(舜)丌(其)幼也,每㠯(以)…寺丌(其)言”

    其詩孔碩、吉甫作誦、2,750,000 以贈申伯.以贈申伯.以贈申伯.以贈申伯.以贈申伯.以贈申伯.以贈申伯.以贈申伯.

    #666690
    Skynet
    Participant

    Martin, he said Plain English not Spanish.

    AUD - 90
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    FAR - 84
    REG - 87
    World Domination Plan

    Phase I : Pass CPA Exams - Complete
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    Phase V : TBD

    #666691
    Meeekks
    Member

    1. They sold redeemable coupons which means it's unearned revenue until it either gets redeemed or the time expires. They should record them at $10.

    2. Beginning Balance = 6 mil

    – Cost of Redemption Yr. 1 = 2.75 mil

    + Liability for Yr. 2 = 1.8 mil (2.25 mil x 0.8 since they said only 80% expected to be redeemed)

    Ending Balance = 5.05 mil

    Not sure where the revenue fits in for this.

    I haven't studied FAR in a month so it's likely that I can be wrong. But I definitely remember doing those questions before though.

    #666692
    Anonymous
    Inactive

    Hi guys,

    I'm not Chinese lol

    I am not asking about the accounting side of it. I really don't follow what coupons are or what the heck the business is doing.

    Thank you @Meeekks

    #666693
    Zumo76
    Participant

    @another85…they are talking about merchandise coupons like they use for living social or groupon. Hope you're familiar with those services? Where are you from, if you don't mind me asking?

    In other words where a business sells a service or good for a discount using a coupon or gift card of sorts. The customer pays for it up front but doesn't redeem the service or good for another month or more. Until the coupon is actually redeemed that's when the company can recognize it. Hope this makes sense using a more real world explanation. The same would happen with your second MCQ re: stamps.

    #666694
    Anonymous
    Inactive

    @ Zumo76

    Thank you so much for the explanation! I've never ever used any coupons or stamps of that sort in my life. I'm not familiar with that; I think your explanation made me realize what those items are for! Fantastic.

    I'm from the United Arab Emirates (Abu Dhabi).

    #666695
    Zumo76
    Participant

    @Another85 Interesting! I worked for a company that used to do seminars and conferences in UAE, Abu Dhabi and Dubai, specifically. Also, had a friend who lived in Abu Dhabi for a couple of years with her husband and two children until they moved back to the states. Only had great things to say about your country.

    You're welcome! Glad my explanation helped. 🙂

    #666696
    Anonymous
    Inactive

    @Zumo76

    I am glad you heard good things about my home country! 🙂

    Thanks.

    #2570100
    Nahdi
    Participant

    Some retailers tend to offer coupons/stamps/stuff if you buy a product A (diapers) which is in promotion. They do their research and determine how can they can target customers to buy this or that product and find that if you offer moms a toy, many will come to the store and buy the product (diapers) and other products as well, but before giving the customer a toy, they first give you a stamp/coupon/voucher that can be redeemable for a toy. In their research, they have also determined that 80% of mom will come back to redeem the toy ( which is true, sometimes they dont go at all to redeem it- due to misplacing the voucher, expires and so on) In reality, they pay for these toys and set them as inventories ( few toys) . For the vouchers that will not be redeemed, after certain period, it will be a revenue to the entity. It will be revenue because when a customer purchased those diapers ( they allocate transaction price x for diaper and x for voucher), however, the voucher will first be recognized as a liability/ obligation. When a customer comes to redeem the voucher, liability goes down and inventory goes down ( DR: liability CR: Inventory (asset)) If customer doesnt show up/voucher expired then DR: Liability CR: Revenue-voucher

    Note: when a customer comes to redeem the voucher, the entity incurs cost of redemption

    For that Question:

    Yr 2:: ( Beginning balance for liability on stamp redemption is 6,000,000)

    DR: Liability on stamp redemption 2,750,000
    CR: Inventory/stamp/asset 2,750,000

    (cost of redemption for prior period)-

    Note: ( In the prior period we credited X amount of liability and matched it by debiting promotion expense (matching principle). Thus the real expense of this was already entered in the prior period- now we just are just reducing balance sheet accounts)

    DR: Premium expense 1,800,000 ( 2,250,000 * 80%)
    CR: Liability on stmp redemption 1,800,000

    estimated 80% cost that the entity has incurred for yr2 sales

    The beginning balance for year 3 would be (600,000 – 2,750,000 + 1,800,000 )

    Stamp service revenue from stamps sold to licensees of $400,000 is there to confuse us so we can complicate things with breakage income, unredeemed revenue and so on. It is an important factor but there is no enough information for us to do everything and start determining what portion is revenue and what is not.

    I hope that explains.

    #3078081
    mmjfr
    Participant

    Hello Nahdi
    i was solving this problem and i got confused with the same thing “the 4,000,000 stamps sales in year 2”
    shouldn't we accrue a new expense and liability for 4,000,000*0.8 so we can complete the whole image and then deduct the amounts actually redeemed ?
    so what i'm saying is that we should have the CR: Liability on stamps redemption 6,000,000 the balance that we have from year 1+ CR: Liability on stamps redemption 3,200,000 (4,000,000*0.8) for stamps sales in year 2 because that's what they said in the question that 80% of the sales would be redeemed so we should accrue for the 3,200,000 in year 2 and then deduct the 2,750,000 prior year cost of redeemed stamps and deduct 1,800,000 (2,250,000*0.8) the current year (year 2) cost of redeemed stamps ??

    mmjfr
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