1.
Prepare the
1.
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 2017 and 2018.
Year | Account Titles and explanation | Debit ($) | Credit ($) |
2017 | 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 ($) |
2017 | 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 ($) |
2018 | 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 ($) |
2018 | 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 | |
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 | $5 | |
Estimated value of total rebate | 500,000 | |
Total transaction price | 4,500,000 |
Table (5)
(2) Calculate the cash received:
(3) Calculate the cash received:
(4) Calculate the sales revenue:
2.
Prepare the journal entry to record the transactions for the year 2018 by assuming that 3000,000 labels were redeemed in 2018.
2.
Explanation of Solution
Year | Account Titles and explanation | Debit ($) | Credit ($) |
2018 | 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:
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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