Question

Suppose a company which sells breakfast cereal puts a coupon in each box of cereal that it sells during the month of December 2017. The coupon permits $1 off the purchase price of the next box of cereal. Customers will present the coupons to grocery stores when they wish to redeem the coupons. The manufacturer will reimburse the grocery stores $1 for each coupon that the stores send to the manufacturer. The manufacturer sells 1,000,000 boxes of cereal in December of 2017. Should the manufacturer accrue an expense in 2017 for the coupon promotion? Why or why not?

Answer 1

Answer: The manufacturer should accrue an expense for $1,000,000 (i.e. 1,000,000 boxes $\times$ $1 coupon) in December 2017.

Explanation:

The manufacturer should accrue an expense for $1,000,000 (i.e. 1,000,000 boxes $\times$ $1 coupon) in December 2017.

As per the matching concept, revenue should be matched with expenses that has been incurred to earn such revenue.

Hence, since the $1,000,000 is an expense incurred for the sales in Dec 2017, the same should be recognized in Dec 17, though the actual payment will be done in future.