Question

In 2016, Holy Oak Inc offered a $20 rebate to customers who purchased one of its new line of products. Holy Oak sold 10,000 of these products during the year. By the year-end, 7600 of the rebates had been claimed and 7100 have been paid. Holy Oak's experience with rebates indicates that 85% of customers claim the rebates. What should be the liability?

Answer 1

Holy Oak Inc should report a liability of $18,000 for the unclaimed rebates, which is calculated by applying the expected claim rate of 85% to the total units sold and then multiplying the unclaimed rebates by the rebate amount of $20 each.

Step-by-step explanation:

The question concerns the determination of liability for rebate offers by a company. The liability should be calculated based on the percentage of rebates that are expected to be claimed. In the given scenario, Holy Oak Inc offered a $20 rebate on a product, with an expectation that 85% of customers will claim the rebates, and sold 10,000 units of the product. To compute the liability, we use the expected rebate claim rate of 85% applied to total units sold.

We first calculate the total expected rebates to be claimed:

• Expected rebates to be claimed = 10,000 units * 85% = 8,500 rebates

Since 7,600 rebates have already been claimed, there are 8,500 - 7,600 = 900 rebates that are expected to be claimed but have not yet been claimed. The total liability for the unclaimed rebates would be:

• Liability for unclaimed rebates = 900 rebates * $20 each = $18,000

Therefore, Holy Oak Inc should report a liability of $18,000 for the expected but unclaimed rebates at the end of the year.