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hampster
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Joined: 29 Dec 2011
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Posts: 2

Posted: 03 May 2012 at 19:50 \| IP Logged

I know this question has been asked before, but the answer is not self-explanatory for me. It's so garbled I don't even know what the business in the example does nor what the terms mean.

This is from F-6 on Becker: CPA01016

http://www.cpanet.com/cpa_forum/forum_posts.asp?TID=25387&am p;PN=1

Can someone explain this in a way that a 9 year old could understand? Thanks.

astone
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Joined: 23 Mar 2011
Location: United States
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Posts: 91

Posted: 03 May 2012 at 20:51 \| IP Logged

Dunn Trading Stamp Co. records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Dunn's past experience indicates that only 80% of the stamps sold to licensees will be redeemed. Dunn's liability for stamp redemptions was $6,000,000 at December 31, Year 1. Additional information for Year 2 is as follows: Stamp service revenue from stamps sold to licensees$4,000,000 Cost of redemptions (stamps sold prior to 1/1/Year 2)2,750,000 If all the stamps sold in Year 2 were presented for redemption in Year 3, the redemption cost would be $2,250,000. What amount should Dunn report as a liability for stamp redemptions at December 31, Year 2?

Choice "c" is correct. $5,050,000 liability for stamp redemptions at 12/31/Year 2. Liab for Stamp Redemptions Begin balance 12/31/Year 1$6,000,000 Add: Redemption cost of Year 2 sales ($2,250,000 x 80%)1,800,000 7,800,000 Less: Cost of redeeming prior year's sales(2,750,000) Ending balance 12/31/Year 2$5,050,000

astone
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Joined: 23 Mar 2011
Location: United States
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Posts: 91

Posted: 03 May 2012 at 21:06 \| IP Logged

Step 1: Compute the revenue/cost ratio = 2,250,000/4,000,000 = .56250

Step 2: Apply the ratio to current year sales = 4,000,000 * .56250 = 2,250,000

Journal Entries:

YR. 1 To record Stamp Sales

DR: Accounts Receivable 10,666,667

CR: Stamp Revenue 10,666,667

CR: Accrued Stamp Liability 6,000,000

DR: Cost of Sales - Stamps 6,000,000

YR. 2 To record Stamp Redemption

DR: Accrued Stamp Liability 2,750,000

CR: Cash A/P 2,750,000

YR. 2 To record Stamp Sales

DR: Accounts Receivable 4,000,000

CR: Stamp Revenue 4,000,000

DR: Cost of Sales - Stamps 2,250,000

CR: Accrued Stamp Liability 2,250,000

Account Activity: Accrued Stamp Liability

Beginning Balance: (6,000,000)

Stamps Redeemed 2,750,000

Current Year Obligation (2,250,000)

Total (5,500,000)

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