Duke Trading Stamp Co. records stamp service revenue and provides
for the cost of redemptions in the year stamps are sold to licensees.
Duke’s past experience indicates that only 80% of the stamps sold to
licensees will be redeemed. Duke’s liability for stamp redemptions was
$7,500,000 at December 31, 2011. Additional information for 2012 is as
Stamp service revenue from stamps sold to licensees $5,000,000
Cost of redemptions $3,400,000
If all the stamps sold in 2012 were presented for redemption in 2013,
the redemption cost would be $2,500,000. What amount should Duke report
as a liability for stamp redemptions at December 31, 2012?