On December 1, 2003, Discount Dudley’s (DD) placed coupons in the local newspape

Question

On December 1, 2003, Discount Dudley’s (DD) placed coupons in the local newspaper for $5 off a $50 purchase. The coupons have an expiration date of March 31, 2004. The number of coupons circulated was 1,500,000 and DD anticipates that 5% of these coupons will eventually be redeemed. During December, 2003, 45,000 coupons were actually redeemed. During January – March, 2004, 50,000 additional coupons were redeemed. These were the only coupons issued during 2003 or 2004.

a. How much expense would be recognized by DD for the coupons for the year ended December 31, 2003?

b. What amount would be shown as a liability related to the coupons on the balance sheet as of December 31, 2003? If none, explain why.

c. How much expense would be recognized by DD for the coupons for the quarter ended March

Explanation / Answer

Discount Dudley a. In December 45,000 Coupons were actually redeemed This number is 5% of the total Coupons issued during the Month of December @ $5 per coupon Hence, the expense recognised by Discount Dudley for the year ended December 31, 2003 would be $ 5 X 900,000 = $ 4,500,000. b. The amount of liability related to the coupons issued in December, as reflected in the Balance Sheet of December 31, 2003 would be $ 5 X 45,000 = $ 225,000. c. Expense recognised by DD for the coupons in respect of the quarter ended March would be $ 5 X 600,000 (1,500,000 - 900,000) = $ 3,000,000.

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