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Answer :
Final answer:
The Fancy Fish Company's rebate expense for 2014 was $37,500 for 150,000 redeemed rebates. Accounting for a 10% historic redemption rate on 5,000,000 sales, the expected rebate liability was originally $125,000. After paying out the rebates, the remaining liability is $87,500.
Explanation:
The student is asking about how to calculate the rebate expense and liability for the Fancy Fish Company based on the promotional activity conducted during the year 2014. The rebate expense represents the actual amount paid out in rebates, while the liability represents the expected amount to be paid based on historical redemption rates. Fancy Fish Company sold 5,000,000 packages of fish food in 2014, with a $.25 rebate available on each package. However, typically only 10% of customers redeem these rebates. The actual number of rebates redeemed was 150,000. Calculating the rebate expense is straightforward: 150,000 rebates at $.25 each are $37,500.
To calculate the rebate liability, we must consider the historic redemption rate of 10% on the total packages sold, which would be 500,000 packages (10% of 5,000,000). At $.25 per rebate, this amounts to $125,000. Since 150,000 rebates have already been paid, we subtract this amount from our potential liability to find what is left: $125,000 - $37,500 = $87,500. The correct answer to the student's question is thus Option D: the rebate expense in 2014 is $37,500, and the remaining rebate liability to be reported on the company's financial statements is $87,500.
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