c2 Premium Liability Lets Get It PDF
c2 Premium Liability Lets Get It PDF
PNEMIUMS
hemiwmsare articles of value such as toys, dishes, silverware
and other goods given to customers as result of past sales or
lales promotion activities. ;i_.,., , .l:... ...
In order to stimulate the sale of their products, entities offer
premiums to custorners in return for product labels, box tops,
wrappers and coupons.
CHAPTER 2 Accordingly, when the merchandise in sold, an accounting
liability for the future distribution of the premium arises
and should be given accounting recognition.
PREMIUM LIABILITY
The accounting procedures for the acquisition of premiums and
recognition of the premium liability are as follows:
Premiums xx
TECHNICAL KNOWLEDGE Cash xx
Premium expense xx
To lznou; the recotgnition of a cash d,iscount offer Estimated premium liability xx
progranx lp'. -:,.
'l
''
To und,erstand, the recognition and, measurement
of a customei loyalty progratn.
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Illustration Computation
An entity manufactures a certain product and sells it at PB00 Wrappers to be redeemed (60% x 10,000 wrappers) , 6,000
per unit. l,ess: Wrappers redeemed 4,000
The bowl costs P50, and itis estimated that 60% of the wrappers Estipated liabilrW (a00 x 40) 19,000
willbe redeemed.
Financial statdment classifi cation
The data for the first year concerning the premium plan are
summarized below. At the end of the year, the accounts related to the premium
plan are classified as fpllows:
Sales, 10,000 units at P300 each 3,000,000
Soup bowls purchased, 2,000 units at P50 each 100,000 Current asset:
Wrappers redeemed t
4,000 Premiums_ sgup bowls 60,000
The entries that would.be made in the first year to record the Current liability:
Estimated premium liability 16,000
sales, premium putchases and redemption, and year.iend
adjustment are:
48,000
1. To record the sales:
Cash 3,000,000
Sales 3,000,000
Premiums
Cash-
soup bowls 100,000
. 100,000
4. Tcj record the liability for the premiums at the end of the
frrst year:
Premium expense 16,000
E stimated premium liability 16,000
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Past experience indicates that 40o/o of the coupons will be The retailers are reimbursed for the face amount of coupons
redeemed. plus 10% for handling. Previous experience indicates that
3O% of coupons will be redeemed'
During the current year, the entity sold 4,000 TV sets and
total payments to customers amounted to P450,000. During the current Year, the entitY issued coupons with face
l. To recognize the cash rebate program:
amount of P5,000,000 and total payments to retailers
amounted to P1, 100,000.
Rebateexpense 800,000
1. To recognize the cash discount coupon offer:
Estimated rebate liability 800,000
Cash discount couPon expense 1,650,000
Rebate coupons issued 4,000 Estimated coupon liabilitY 1,650,000
Expected to be redeemed 40%
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Recognition
The consideration alLocated to the award credits is initially
recognized as deferred revenue and subseqriently
recognized as revenue when the award credits are redeemed.
Illustration - IFRS 15
.Iournal entries
An entity, a grocery retailer, ciper6rtes a customer loyalty
program. 'l'hc initial sale in 2020 is recorded as follows:
The entity grants program members loyalty points when they (lash ' 9,000,000
spend a specified amount on groceries. Sales 8,100,000
groceries. The points have. no expiry date. Redemption of 4,000 points in 2020
The sales during 2Q20 amounted to P9,000,000 based on Unearned revenue -points 450,000
stand-alone selling price. Sales 450,000
On December 31, 2020,4,000 points have been redeemed in Points redeemed tnZO2O 4,000
exchange for groceries. Points redeemed inZO2I 4,100
In 202I, the management revised expectations and now Totalpoints redeemed to December 3l,2OZI qJ0q
expects that 90% or 9,000 points will be redeemed Oumulative revenue on December 31, 2021
altogether. (8,100 / 9,000 x 900,000) 810,000
During 2021, the entity redeemed 4,100 points. In 2022, a Revenue recognized in 2020 (450,000)
further 900 points are redeemed. Revenue to be recognized. in 2021 _q99!9q
Management continues to expect that only 9,000 points will Redemption of 900 points in 2022
ever be redeemed, meaning, no more points will be red'eemed
after 2022. Unearned revenue -points 90,000
SaIes 90,000
Allocation of transaction price Points redeemed in 2020 4,000
Points redeemed in2021 4,100
Product sales 9,000,000 Points redeemed in2022 900
Points - stand-alone selling price (10,000 x 100) 1,000,000
Totalpoints redeemed to December 31,2022 9!99_
Total 10,000,000
Cumulative revenue - Decembe r 31, 2022
Product sales (9,000,000 / 10,000,000 x 9,000,000) 8,100,000 (9,000 / 9,000 x 900,000) 900,000
Points (1,000,000 / 10,000,000 x 9,000,000) 900,000 Cumulative revenue - Decernbe r 3L, 2O2l (810,000)
Total transaction price 9,000,000 Revenue to be recognizedin?O2? 90,000
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Required: Required:
1. Prepare journal entries for 2020 and 2021.
2. Statement classification of the account balances pertaining Prepare appropriate journal entries for the current year to
to the premium plan. recognize the cash rebate program.
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Redeemed Expectedto be redeemed 1. Wirlt amount should" be reported as premium expense for
2020 15,000 2020?
2021 7,950 ' SOYa
85%
2022 , 2,550 85%
a. 640,000
2023 90% b. 384,000
.turooo c. 240,000
Required d. 160,000
Prepare journal entries from 2020 to 2028.
2. What is the estimated liability for premium ulaims
outstanding on I)ecember 3I,2020?
a. 169,000
b. 224,OOO
c. 288,000
d. 384,000
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