Johnson and Johnson (J&J) is a public company with a calendar year end. J&J manufactures toothpaste that is ultimately purchased and used by consumers. The supply chain consists of the following:
- J&J sells its toothpaste to a wholesaler;
- Wholesaler sells the toothpaste to a retailer; and
- Retailer sells the toothpaste to a consumer.
J&J launches a new toothpaste, Shiny Teeth, on September 1, 2012. In connection with this launch, J&J developed a comprehensive marketing campaign. Part of the campaign involves releasing approximately 500,000 coupons in Sunday newspapers in locations in which the new toothpaste will be sold. When a consumer redeems the coupon upon purchasing the product from a retailer, the price charged is reduced by $1. This retailer sends the coupon to a clearinghouse. J&J reimburses the retailer for the discount provided to the customer.
J&J discontinues the coupons for this product on October 1, 2012. The coupons expire on October 1, 2013. J&J has not offered coupons on toothpaste before, nor have they offered coupons with a one-year expiration period. They have, however, offered coupons with a six-month expiration date on other products. These coupons had a 1.5 percent redemption rate. J&J estimates that approximately 2 percent of the toothpaste coupons will be redeemed by customers prior to the expiration date. However, J&J does not have any data on the redemption rate for coupons offered on toothpaste. J&J has sold and recognized revenue for over $2,000,000 of Shiny Teeth into the supply chain by September 30, 2012.
J&J is considering how it should account for the Shiny Teeth coupon drop that took place on October 1, 2012. In doing so, J&J asks for your help. Prepare a memo addressing the following questions. Base your analysis of these questions on the relevant authoritative literature and discuss the support in that literature for your conclusions. Be sure to cite the relevant components of the Condification in your discussions. Citations are not required for journal entries.
1. What are the accounting issue(s) and the relevant components of the authoritative literature?
1) Revenue recognition
a) When and How
2. When should J&J recognize the effects of the Shiny Teeth coupon drop on its financial statements?
3. What is the dollar amount of the effect of Shiny Teeth coupon drop on J&J's financial statements?
4. What would constitute "sufficient evidence" to support J&J's expected redemption rate of 2 percent?
5. What are the accounting implications if J&J's estimated redemption rate changes to 1.5 percent at a later point in time?
6. How should the effects of the Shiny Teeth coupon drop be reflected in the income statement?
7. What are the necessary journal entries?