Lakeshore Gelato Distributors (LGD) Began A Special Promotio
Lakeshore Gelato Distributors (LGD) Began a Special Promotion in July
Lakeshore Gelato Distributors (LGD) initiated a promotional campaign in July 2012, which involved placing coupons on top of each gallon of gelato sold. Customers could collect five coupons to receive a free mini ice cream scooper, which cost LGD $2.00 each. Management estimated that 70% of the coupons would be redeemed. For the six months ending December 31, 2012, LGD sold 2,000,000 gallons of gelato, purchased 240,000 scoops, and received 560,000 coupon redemptions. The task is to record all necessary journal entries related to this promotion for 2012.
Paper For Above instruction
The promotional campaign introduced by Lakeshore Gelato Distributors (LGD) in July 2012 was a strategic marketing effort aimed at increasing sales and customer engagement through a coupon-based incentive. The core of this promotion involved attaching coupons to each gallon of gelato sold, which customers could exchange for a free mini scoop after collecting five coupons. With an estimated redemption rate of 70%, LGD anticipated significant customer interaction with this promotion.
The associated costs and liabilities have to be accurately recorded in the company's financial statements. The key accounting considerations include recognizing the liability for the expected redemption of coupons and the associated cost of providing the free scoops, as well as adjusting these records based on actual redemptions and purchases.
Estimating the Liability for Coupon Redemptions
Initially, LGD estimated that 70% of the coupons would be redeemed, which necessitates recognizing a liability at the time of sale that corresponds to the expected number of scoops the company will give away. Given that 2,000,000 gallons of gelato were sold, and each gallon had a coupon attached, the total number of coupons issued equates to 2,000,000.
The expected number of redemptions is calculated as:
\[ \text{Expected Redemptions} = \text{Total Coupons Issued} \times \text{Redemption Rate} = 2,000,000 \times 70\% = 1,400,000 \]
However, since the actual coupons redeemed were 560,000, the company needs to adjust its liability accordingly, recognizing expense for the coupons redeemed and recording a liability for the remaining estimated redemptions.
Journal Entry for Recognizing the Liability
At the time of sale, LGD should record a liability based on the estimated redemptions:
```plaintext
Debit: Advertising Expense (or Promotion Expense) $2,800,000
(560,000 scoops × $2.00 per scoop)
Credit: Coupon Liability $2,800,000
```
This entry accounts for the cost of scoops expected to be redeemed, based on actual redemptions. Since the actual redeemed coupons are less than expected, LGD may need to adjust its liability later.
Recording the Redemptions
When the coupons are redeemed, LGD needs to recognize the expense and reduce the liability:
```plaintext
Debit: Coupon Liability $1,120,000
Credit: Inventory (or Supplies) $1,120,000
(560,000 scoops × $2.00 per scoop)
```
In this case, since the scoops were purchased, the company records the transfer of inventory to expense or reduction in liability, reflecting the actual redemptions.
Adjustments Based on Actual Redemptions
As the actual number of coupon redemptions is 560,000, and the initial estimate was 1,400,000, LGD would adjust its liability and expense accounts accordingly at the period-end:
```plaintext
Debit: Coupon Liability $1,120,000
Credit: Promotion Expense $1,680,000
(Remaining estimated redemptions: 840,000 scoops x $2)
```
This entry adjusts the liability and expense to reflect the difference between the initial estimate and actual redemptions.
Purchase of Scoops
LGD purchased 240,000 scoops for the promotion. The total cost based on the scoop price is:
\[ 240,000 \times \$2.00 = \$480,000 \]
The purchase of scoops should be recorded as:
```plaintext
Debit: Inventory (or Supplies) $480,000
Credit: Accounts Payable (or Cash) $480,000
```
Summary
The accounting treatment involves estimating liabilities at the point of sale, recording actual redemptions and costs as they occur, and adjusting for differences between estimated and actual redemption rates. This ensures that LGD's financial statements accurately reflect the costs and liabilities associated with the promotion.
Finally, a comprehensive review of the promotional expenses and liabilities should be performed at the end of the period to ensure all figures are accurately reported in accordance with generally accepted accounting principles (GAAP).
References:
- Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2020). Intermediate Accounting (16th ed.). Wiley.
- Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2019). Financial Statement Analysis (12th ed.). McGraw-Hill Education.
- FASB. (2014). Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers.
- Anderson, P. (2017). Promotional Accounting and Customer Incentives. Journal of Accounting Research, 55(2), 395–424.
- IASB. (2018). IFRS 15, Revenue from Contracts with Customers.