Question

Ultra-energy Company offers a cash rebate of $2 on each $9 package of protein powder sold during 2014. Historically, 20% of customers mail in the rebate form. During 2014, 3,000,000 packages are sold, and 250,000 $2 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the company's 2014 financial statements?

A. $500,000; $700,000
B. $1,200,000; $700,000
C. $1,200,000; $500,000
D. $500,000; $1,200,000

Answer 1

The rebate expense is $6,000,000 and the rebate liability is $1,200,000.

Step-by-step explanation:

To calculate the rebate expense, we need to determine the number of packages that were sold and multiply that by the rebate amount. In this case, there were 3,000,000 packages sold, so the rebate expense is 3,000,000 x $2 = $6,000,000.

To calculate the rebate liability, we need to consider the percentage of customers who mail in the rebate form. In this case, 20% of customers mail in the rebate form, so the rebate liability is 20% of $6,000,000 = $1,200,000.

Therefore, the rebate expense is $6,000,000 and the rebate liability is $1,200,000.