Drew-Richards iMusic is a regional music media reseller. As a promotion, it offe

Question

Drew-Richards iMusic is a regional music media reseller. As a promotion, it offered $5 cash rebates on specific CDs. Customers must mail in a proof-of-purchase seal from the package plus the cash register receipt to receive the rebate. Experience suggests that 70% of the rebates will be claimed. Twenty thousand of the CDs were sold in 2013. Total rebates to customers in 2013 were $22,000 and were recorded as promotional expense when paid. The fiscal year ends on December 31. What would be the appropriate journal entry to record the contingency?

Explanation / Answer

They sold 20,000 of the CD's. That means $100,000 in rebates out there. However, since they estimate only 70% will be claimed, the total promotional expense they are anticipating is $70,000, which you nailed. Within that $70,000, $22,000 was actually claimed in 2011, so they believe they have a liability of $48,000 coming up in 2011. The entry would be to debit promotions for $48,000, and credit accrued promotion or contingency for $48,000. They said when the $22,000 was paid out, it was recorded as promotional expense, so the entry only has to be for $48k.

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