THE ABC WAREHOUSE REBATE OFFER ABC Warehouse advertised the following special of
ID: 2400758 • Letter: T
Question
THE ABC WAREHOUSE REBATE OFFER ABC Warehouse advertised the following special offer to customers: A 50 percent cash rebate on your purchases in ten years. The offer was subject to several conditions: • This offer applies to all purchases. • The application form and a copy of the store receipt must be mailed within 21 days of purchase. Upon receipt, ABC would issue a rebate certificate. • The rebate certificate must be available ten years from today and must be submitted within 90 days of the ten-year maturity date. • Customers must survive; rebates are not transferable. • Customers cannot misplace any of the documents. Customers are protected even if ABC goes out of business or is sold. ABC will purchase insurance to guarantee payment of the rebates in the (unlikely) event they go bankrupt. Assuming all of the conditions were met, ABC would send a 50 percent cash rebate after ten years. The offer received attention in the local and regional business press. The offer appeared unique in the U.S., but the reporter noted that such promotions had been successfully employed in the past in both Canada and Europe. The offer was made near the end of ABC’s fiscal year (Year 0). Assume that the promotion ran for two weeks and generated sales of $5 million. For simplicity, you may assume that all sales were cash sales. You may also assume the ABC’s gross margin is 20 percent of sales. Reminder: I don’t need a Cash amount (balance) on the B/S. Take Home Exam Question What amounts will appear in ABC’s Balance Sheet and Income Statement with respect to this problem (year 0 only). Provide the account name(s) and the amounts. Show supporting calculations for any amounts not given in the problem.
Explanation / Answer
$5 million will appear in the income statement and gross margin which is 20% of the sales revenue will be come to $1 million. And a provision of ($5 million X 50%)/((1+Discount Rate)^10) will be made and shown in Balance Sheet and its value will be recalculated next year by replacing 10 by 9 as after one year 9 more years will be remaining. For Example, if we take discount rate of 6%, then the provision of $1.40 million will be shown in balance sheet as a provision.
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