Problem 2-5 (AICPA Adapted)

Case Cereal Company distributed coupons to promote new products.

On October 1, 2019, the entity mailed 100,000 coupons for P45 off each box of cereal purchased.

The entity expected 12,000 of these coupons to be redeemed before the December 31, 2019 expiration
date.

It takes 30 days from the redemption date for the entity to receive the coupons from the retailers.

The entity reimbursed the retailers an additional P5 for each coupon redeemed.

On December 31, 2019, the entity had paid retailers P250,000 related to these coupons and had 5,000
coupons on hand that had not been processed for payment.

1. What amount should be reported as liability for coupons on December 31, 2019?
a. 350,000
b. 290,000
c. 250,000
d. 225,000

Solution 2-5

Answer a

Coupons expected to be redeemed 12,000

Multiply by payment for each coupon (45 + 5) 50

Total liability for coupons 600,000

Payments on December 31, 2019 (250,000)

Liability for coupons - December 31, 2019 350,000

The coupon liability on December 31, 2019 is not reduced by the 5,000 coupons on hand because the
coupons had not been processed for payment.