CHAPTER 1

PREMIUM LIABILITY
Problem 1-1(AICPAAdapted)
In an effort to
increase sales, Mill Company
inaugurated a sales
promotional campaign on June 30, 2018. The entity
redeemable for a placed a coupon
premium in each package of cereal sold.
Each premium cost P20 and five
coupons must be presented by a
customer to receive a premium. The
of the coupons issued would be entity estimated that only 60%%
redeemed.
For the six months ended December
31, 2018, the following
information is available:
Packages of cereal sold
Premium purchased 160,000
12,000
Coupons redeemed 40,000
1. What is the premium expense for 2018?
a. 640,000
b. 384,000
C. 240,000
d. 160,000
2. What isthe estimatedliability for premiumson December 31,2018?
a. 160,000
b. 224,000
C. 288,000
d. 384,000
Solution 1-1 Question 1 Answer b Question 2 Answer b.

Coupons to be redeemed (160,000 x 60%) 96,000

Coupons redeemed 40,000)
Coupons outstanding 56,000
Premium expense (96,000/5 19,200x20) 384,000
=

Estimated liability (56,000/5= 11,200 x 20) 224,000

1
 Problem 1-2(AICPAAdapted)
During the current year, Day Company sold 500,000 boxes of cake
mix under a new sales promotional program.
Each box contained one coupon, which entitled the customer to a
baking pan upon remittance ofP40.
The entity paid P50 per pan and P5 for handling and shipping and
estimated that 80% of the coupons would be redeemed, even though
only 300,000 coupons had been processed during the year.

1. What is the premium expense for the current year?

a. 6,000,000
b. 7,500,000
c. 4,500,000
d. 2,000,000
2. What amount should be reported as liability for unredeemed
coupons at year-end?
a. 1,000,000
b. 1,500,000
C. 3,000,000
d. 5,000,000

Solution 1-2

Questionl Answera
Net premium expense (50 + 5 -

40)

Coupons to be redeemed (80% x 500,000) 400,000

Coupons redeemed
(300,000)
Coupons outstanding 100,000
Premium expense (400,000x 15)
6,000,000
Question 2 Answer b

Liability for unredeemed coupons (100,000 x 15)

1,500,000

2
Problem 1-3(AICPAAdapted)
In packages of the products, Curran
that may be presented at retail stores Company
included coupons
to obtain discounts on other
Curran products.
Retailers were reimbursed for the face amount of coupons redeemed
plus 10% of that amount for handling costs.
The entity honored requests for coupon redemption by retailers upP
to three months after the consumer expiration date.
The entity estimated that 70% ofall coupons issued would ultimately
be redeemed. The consumer expiration date is December 31, 2018.
The total face amount of coupons issued was P600,000 and the total
payments to retailers during 2018 amounted to P220,000.
1. What is the premium expense for 2018?
a. 600,000
b. 180,000
C. 462,000
d. 198,000
2. What amount should be reported as liability for unredeemed coupons
on December 31, 2018?

a. 308,000
b. 200,000
C. 242,000
d. 0

Solution 1-3

Question l Answer C
Question 2 Answer c

Total coupons to be redeemed

(600,000x 70% x 110%) 462,000
Total payments to retailers (220,000)
December 31, 2018 242,000
Liability for unredeemed coupons
3
 Problem 1-4 (AICPAAdapted)
Blake Company mailed coupons to consumers which may be presented
at a stated expiration date at retail food stores to obtain discounts on
certain Blake products.
Retailers were reimbursed for the face value of coupons redeemed
plus 10% ofcoupon face value as compensation for handling costs.
The entity honored requests for coupon redemption by retailers received
up to three months after the expiration date. Based on past experience,
60% of the coupons issued ultimately are redeemed.
The entity provided the following information with respect to the two
separate series of couponsissued during 2018:
Series A Series B

Consumer expiration date June 30, 2018 December 31,2018

Total face value of coupons issued 1,000,000 2,000,000
Total payments to retailers on
December 31,2018 605,000 405,000

What amount should be reported as liability for unredeemed coupons

on December 31, 2018?
a. 970,000
b. 915,000
C. 795,000
d. 0

Solution 1-4 Answer b

Total face value of coupons - Series B 2,000,000
Muitiply by 60%
Coupons to be redeemed 1,200,000
Compensation for handling costs (10% x 1,200,000) 120,000
Total liability for coupons 1,320,000
Payments to retailers - Series B 405,000)
Estimated liability-December 3 1, 2018 915,000

The Series A coupons already expired on June 30, 2018 and therefore
there is no more estimated liability.
4
Problem 1-5 (AICPAAdapted)

Case Cereal Company distributed coupons to promote new

products. On October 1,2018, the entity mailed 100,000 coupons
for P45 off each box of cereal purchased.
The entity expected 12,000 ofthese coupons to be redeemed before
the December 31, 2018 expiration date.
It takes 30 days from the redemption date for the entity to receive
the coupons from the retailers. The entity reimbursed the retailers
an additional P5 for each coupon redeemed.
On December 31, 2018, the entity had paid retailers P250,000
hand that had
related to theses coupons and had 5,000 coupons on
not been processed for payment.

What amountshould be reported as liability for coupons onn

December 31, 2018?

a. 350,000
b. 290,000
c. 250,000
d. 225,000

Solution 1-5 Answer a

be redeemed 12,000
Coupons expected to 50
payment for
each coupon (45 + 5)
Multiply by
600,000
Total liability for coupons
31, 2018 (250,000)
Payments on December

December 31, 2018 350,000

Liability for
-

coupons

December 31, 2018 is not reduced by the

The coupon liability on

hand because the coupons had not been processed

5,000 coupons on
for payment.
Problem 1-6 (AICPA Adapted)
Baker Company sold consumer products that are packaged in boxes.
The entity offered an unbreakable glass in exchange for two box tops
and Ps0 as a promotion during the current year. The cost ofthe glass
was P200.

The entity estimated at the end the year that it would be probable that
50% of the box tops will be redeemed.
The entity sold 100,000 boxes of the product during the current year
and 40,000 box tops were redeemed during the year.

1. What is the premium expense for the current year?

a. 3,750,000
b. 3,000,000
c. 5,000,000
d. 4,000,000
2. What amount should be reported as estimated liability at year-end?
a. 3,000,000
b. 1,500,000
c. 750,000
d. 0

Solution 1-6
Questionl Answera
Cost of glass 200
Remittance from customer
(50)
Net premium cost 150
Box tops to be redeemed (50% x 100,000)
Box tops redeemed
50,000
40,000
Outstanding 10,000
Premium expense (50,000/2 25,000 x 1S0) 3,750,000
Question 2 Answer c

Estimated liability at year-end (10,000/2= 5,000 x 150) 750,000

Problem 1-7 (AIÇPA Adapted)
Topsy Company started a new promotional program. For every 10
box tops returned, customers receive a
basketball.
The entity estimated that only 60% ofthe box
tops reaching the market
would be redeemed.

Units Amount
Sales of product 100,000 30,000,000
Basketballs purchased 5,500 4,125,Q00
Basketballs distributed 4,000
1. What is the premium expense for the year?
a. 4,500,000
b. 1,500,000
C. 4,125,000
d. 7,500,000
2. What is the amount of year-end estimated liability associated with
this promotion?
a. 4,125,000
b. 1,500,000
C. 3,000,0000
d. 4,500,000

Solution 1-7

Question l Answer a
60%/ 10) 6,000
Basketballs to be distributed (100,000
x

Basketballs distributed 4,000

Balance
2,000

(4,125,000/5,500) 750
Cost of basketball
4,500,000
Premium expense (6,000 x 750)

Question 2 Answer b
1.500,000
Estimated liability (2,000 x 750)
Problem 1-8 (IAA)
Charlene Company includes one coupon in each box of laundry soap it
sells. A towel is offered as a premium to customers who send in 10
coupons and a remittance ofP10.
Distribution cost ofpremium is P5. Experience indicates that only 30%
ofthe coupons will be redeemed.
2018 2019
Boxes of soap sold 2,000,000 2,500,000
Number of towels purchased at PS0 each 50,000 80,000
Coupons redeemed 400,000 700,000
1. What is the premium expense for 2018?
a. 2,500,000
b.2,400,000
C. 1,800,000
d. 2,700,000

2. What is the estimated premium liability on December 31, 2018?

a. 1,000,000
b 1,100,000
C. 800,000
d. 900,000
3. What is the premium expense for 2019?
a. 3,000,000
b. 3,750,000
C. 3,375,000
d. 4,000,000

4. What is the estimated premium liability on December 31, 20197

a. 1,000,000
b. 1,250,000
C 1,125,000
d. 1,375,000
Solution 1-8

Questionl Answer d
Cost of towel 50
Remittance from customer (10)
Distribution cost
Net premium cost
45
Coupons to be redeemed in 2018 (2,000,000 x 30%) 600,000
Coupons redeemed in 2018 (400,000)
Coupons outstanding - December 31, 2018
200,000

Premium expense for 2018 (600,000/ 10 x 45) 2,700,000

Ouestion 2 Answer d

Estimated liability -12/31/2018 (200,000/ 10x 45) 900,000

Question 3 Answer c
Coupons to be redeemed in 2019 (2,500,000 x 30%) 750,000

Premium expense for 2019 (750,000/ 10 x 45) 3,375,000

Question 4 Answer c

Coupons outstanding
-
December 31, 2018 200,000
Coupons to be redeemed in 2019 (2,500,000 x 30%) 750,000
Total coupons to be redeemed 950,000
Coupons redeemed in 2019 (700,000)

Coupons outstanding
-
December 31, 2019 250,000
Estimated liability - 12/31/2019 (250,000/ 10 x 45) 1,125,000
 Problem -9 (IAA)
Love Company included one
coupon in each package sold. A premium
is offered to customers who
send in 10 coupons.
2018 2019
Number of packages sold 500,000 800,000
Number of premiums purchased at P40 each 30,000 60,000
Number of premiums distributed 20,000 50,000
Number of premiums to be distributed next period 5,000 3,000
1. What amount should be reported as premiun1 expense for 2018?
a. 1,000,000
b. 1,200,000
C. 600,000
d. 500,000
2. What is the premium liability on December 31, 2018?

a. 400,000
b. 200,000
C. 600,000
d. 300,000

3. What amount should be reported as

premium expense in 20197
a. 2,400,000
b. 2,000,000
C. 2,120,000
d. 1,920,000

4. What is the
premum liability on December 31, 2019?
a. 320,000
b. 400,000
C. 120,000
d. 520,000

10
Solution 1-9

Ouestion l Answera

Number of premiums distributed in 2018 20,000

Number of premiums to be distributed in 2019 5,000
Total premiums in 2018 25,000
Premium expense for 2018 (25,000x 40) 1,000,000
Ouestion 2 Answerb

Extimated liability 12/31/2018 (5,000 x 40)

-

200,000
Question 3 Answer d
Premiums distributed in 2019 50,000
Premiums to be distributed in 2020 3,000
Total 53,000
Premiums arising from 2018 sales distributed in 2019 ( 5,000)
Premiums applicable to 2019 48,000
Premium expense for 2019 (48,000 x 40) 1,920,0000

Question 4 Answer c

Estimated liability -
12/31/2019 (3,000 x 40) 120,000
Problem 1-10 (LAA)
At the beginning of curent year, Clam Company offers the customers a
pottery cereal bowl if they send in three boxtops from the products and
P10. The entity estimated that 60% of the boxtops would be redeemed.

redeemed
During the year, the entity sold 675,000 boxes and customers
330,000 boxtopsreceiving 110,000 bowls.
The cost of each bowl is P25.
1. What is the premium expense for the current year?

a. 2,025,000
b. 6,075,000
C. 4,550,000
d. 1,650,000
2.
2. What is the liability for outstanding premiums at year-end?
a. 250,000
b. 375,000
C. 625,000
d. 875,000

Solution 1-10

Question l Answer a
Boxtops to be redeemed (60% x 675,000) 405,000
Boxtops redeemed (330,000)
Boxtops outstanding 75,000
Cost of cereal bowl 25
Remittance from customer
(10)
Net cost of premium
15
Premium expense (405,000/3 x 15) 2,025,000
Qruestion 2 Answerb
Estimated liability (75,000/3 x 15) 375,000

12
Problem 1-1 (AA)

Energy Company offereda cash rebate of P20 on each P150 package

of batteries sold during the current year. Historically, 10% of customers
mail in the rebate form.
During the year, 600,000 packages of batteries are sold, and 25,000
P20 rebates are mailed to customers.
1. What amount ofrebate expense should be reported for the current
year?
a. 1,200,000
b. 1,500,000
C. 500,000
d. 600,000
2.
2. What amount should be reported as rebate liability at year-end?
a. 700,000
b. 500,000
C. 350,000
d. 400,000

Solution 1-11

Question l Answera
Rebate expense (10% x 600,000 x 20) 1,200,000

Question 2 Answer a
Rebate expense 1,200,000
Rebate paid (25,000 x 20) 500,000)
Rebate liability 700,000
 Problem 1-12 IAA)
During the current year, Deluxe Company sold 80,000 reversible belts
under a new sales
promotional program. Each belt carried one coupon
which entitled the customer to a P50 cash rebate.
The entity estimated that 70% ofthe coupons will be redeemed even
though only 35,000 coupons had been processed during the urrent
year.

1. What amount of rebate expense should be reported for the current

year?
a. 4,000,000
b. 2,800,000
c. 1,750,000
d. 2,250,000

2. What amount should be reported as rebate liability for unredeemed

coupons at year-end?

a. 1,750,000
b. 1,050,000
C. 1,225,000
d.

Solution 1-12

Questionl Answer b
Coupons to be redeemed (70% x 80,000) 56,000
Multiply by cash rebate per coupon 50
Rebate expense
2,800,000
Question 2 Answer b
Rebate expense
Rebate paid (35,000 x 50) 2,800,000
Rebate liability
(1,750,000)
1,050,000
14
Problem 1-13 (IFRS)
Arianne Company, a grocery retailer, operates a customer loyalty
program. The entity grants program members loyalty points when they
spend a specified amount on groceries.

Program members can redeem the points for further groceries. The
points have no expirty date.

During 2018,the sales amounted to P7,000,000 based on stand-alone

selling price.
During the year, the entity granted 10,000 points. But management
expected that only 80% or 8,000 points will be redeemed.

The stand alone selling price ofeach loyalty point is P100.

On December 31,2018, 4,800 points have been redeemed.

In 2019, management revised its expectations and now expected that

90% or 9,000 points will be redeemed altogether.

During 2019, the entity redeemed 2,400 points.

1. What amount should be reported as sales revenue including the

revenue earned from points for 2018?

a. 7,000,000
b. 8,000,000
C. 6,125,000
d. 6,650,000
for 2019?
2. What is the revenue earned from loyalty points
a. 700,000
b. 210,000
c. 175,000
d. 200,000
Solution 1-13

Questionl Answerd
Product sales 7,000,000
Points granted during the year (10,000 x 100) 1,000,000
Total 8,000,000
Product sales (7,000,000/8,000,000 x 7,000,000) 6,125,000
Points (1,000,000 /8,000,000 x 7,000,000) 875,000
Total transaction price 7,000,000
Product saies 6,125,000
Revenue from points redeemed in 2018
(4,800/8,000 x 875,000) $25,000
Total revenue in 2018 6,650,000

Cash 7,000,000
Sales 6,125,000
Unearned revenue -points 875,000
Unearned revenue -points 525,000
Sales
525,000
Question2 Answerc
Points redeemed in 2018
Points redeemed in 2019
4,800
2,400
Total points redeemed to December 31, 2019 7.200
Cumulative revenue on December 31, 2019
(7,200/9,000 x 875,000)
Revenue from points recognized in 2018 700,000
Revenue from points earned in 2019
(525,000)
175,000
Unearned revenue points
Sales 175,000
175,000

16
Problem 1-14 (IFRS)
Jamaica Company, a retailer of electrical goods, participates in a
customer loyalty program operated by an airline.
The entity grantsprogram members one air travel point for every Pl,000
spent on electrical goods.
Program members can redeem the points for travel with the airline
subject to availability. The entity pays the airline P60 for each point.

During the current year, the entity sold electrical goods for consideration
totaling P4,500,000 based on stand-alone selling price and granted
5,000points with stand-alone selling price ofP100 per point.
1. What amount should be recognized as produet sales revenue?

a. 4,500,000
b. 4,050,000
c. 5,000,000
2,500,000
2. What is the net revenue from points?

a. 450,000
b. 150,000
C. 200,000
d. 300,000
Answer b Ouestion 2 Answerb
Solution 1-14 Question 1
Selling price Fraction Allocated

Product sales 4,500,000 45/50 4,050,000

Points (5,000 x 100) 500,000 5/50 450,000
5,000,000 4500,000

Revenue from points

450,000
(300,000)
Payment to airline (5,000 x 60)
Net revenue from points
150,000

Jamaica Company has fulfilled its obligation

by granting the points.
electrical goods
from points is recognized when the
Therefore, revenue

are sold.

17
Problem 1-15 (IFRS)
Alyanna Company operates a customer loyalty program. The entity
grants program members loyalty points when they spend a specified
amount on purchases.

Program members can redeem the points for further purchases. The
points have no expiry date.
During 2018, the customer earmed 60,000 points. Management expects
that 100% ofthesepoints will be redeemed. The stand-alone selling
price of each loyalty point is P20.
The sales during 2018 amounted to P6,800,000 based on stand-alone
selling price.
On December 31, 2018, 28,800 points have been redeemed in
exchange for purchases.

In 2019, the management revised expectations and now expects 90%

of the points to be redeemed.

In 2019, the entity redeemed 9,000 points.

1. What amount of the transaction price should be allocated to the
points?
a. 1,800,000
b. 1,200,000
c. 1,020,000
d. 0
What is the revenue earned fromloyalty points for 2018?
a. 576,000
b. 489,600
C. 510,000
d.
2019?
3. What is the revenue earned from loyalty points for
a. 224,400
b. 714,000
C. 170,000
d.
18
 Solution 1-15
Ouestion I Answer c

Pointsgranted during the year (60,000 x 20)

Product sales 1,200,000
6,800,000
Total
8,000,000
Allocated price of points (1,200/8,000 6,800,000)
x 1,020,000
Question 2 Answer b

Points to be redeemed in 2018

(100% x 60,000) 60,000
Revenue to be recognized in 2018
(28,800/60,000 x 1,020,000) 489,600
Ouestion 3 Answera
Points to be redeemed in 2019 (90% x 60,000) 54,000
Points redeemed in 2018 28,800
Points redeemed in 2019 9,000
Total points redeemed to December 31, 2019 37,800

Cumulative revenue December 31, 2019

(37,800/54,000 x 1,020,000) 714,000
Revenue recognized in 2018 (489,600)
Revenue to be recognized in 2019 224,400

19
 CHAPTER 2
WARRANTY LIABILITY
Problem 2-1 (AICPAAdapted)
Mill Company sells washing machines that carry a three-year
warranty ågainst manufacturer's defects.
Based on the entity's experience, warranty costs are estimated at
P300 per machine.
During the current year, the entity sold 2,400 washing machines and
paid warranty costs of P170,000.
1. What amount should be reported as warranty expense for the
year?
a. 170,000
b. 240,000
C. 550,000
d. 720,000

2. What amount should be reported as warranty liability at year-end?

a. 550,000
b. 720,000
C. 170,000
d. 0

Solution 2-1

Ouestion 1 Answer d

Warranty expense (2,400 x 300) 720,000

Ouestion 2 Answer a
Warranty expense 720,000
Warranty payment (170,000)
Warranty liability 550,000

20
Problem 2-2 (AICPA Adapted)
On April 1, 2018, Ash Company began offering a new product for
sale under a one-year warranty.

Of the 50,000 units in inventory on April 1, 2018, 30,000 had been

sold by June 30, 2018.

Based on its experience with similar products, the entity estimated

that the average warranty cost per unit sold would be P80.

Actual waranty costs incurred from April 1 through June 30, 2018
amounted to P700,000.

1. What is the warranty expense for 2018?

a. 2,400,000
b. 4,000,000
C. 2,000,000
d. 1,200,000

2. On June 30, 2018, what is the estimated warranty 1liability?

a. 900,000
b. 1,600,000
C. I,700,000
d. 3,300,000

Solution 2-2

Questionl Answer a

Warranty expense (30,000 x 80) 2,400,000

Question 2 Answerc

Warranty expense 2,400,000

Actual warranty cost 700,000)
June 30, 2018 1,700,000
Warranty liability -

21
Problem 2-3 (AICPA Adapted)
Bold Company estimated the annual
warranty expens at 2% of
annual net sales. The net sales for 2018 amounted to P4,000,000.
On January 1, 2018, the warranty liability was P60,000 and the
warranty payments during 2018 totaled P50,000.

1. What is the warranty

expense for 2018?
a. 70,000
b. 50,000
C. 80,000
d. 60,000

2. What is the warranty

liability on December 31, 2018?
a. 10,000
b. 70,000
c. 80,000
d. 90,000

Solution 2-3

Question I Answer c

Warranty expense for 2018 (2% x 4,000,000) 80,000

Question 2 Answer d

Warranty liability-January 1, 2018

Warranty expense for 2018 (2% 60,000
Total
x
4,000,000) 80,000
Warranty payments during 2018 140,000
Warranty liability- December 31, 50,000)
2018
90,000
 Problem 2-4 (AICPA Adapted)
Wall Company sold a product under a two-year warranty. The estimated
cost of warranty repairs is 2% of net sales.
During the first two years in business, the entity made the following
sales and incurred the following warranty repair costs:
2018 2019
Net sales 2,500,000 3,000,000
Total repair costs incurred 45,000 50,000
What amount should be reported as warranty expense for 2019?
a. 60,0000
b. 50,000
C. 10,000
d. 59,000
Solution 2-4 Answer a
Warranty expense for 2019 (2% x 3,000,000) 60,000

Problem 2-5 (LAA)

Bass Company manufactures high-end home electronic systems. The
entity provides a one-year warranty for all products sold.
The entity estimated that the warranty cost is P200
per unit sold and
reported a liability for estimated warranty cost of P650,000 at the
beginning ofthe year
During the current year, the entity sold 5,000 units for a total of
P9,000,000 and paid warranty claims of P750,000 on current and prior
year sales.
What is the waranty liability at year-end?

a 250,000
b. 350,000
C. 900,000
d. 750,000
Solution 2-5 Answer c
Warranty 1liability-January 1 650,000
(6,000 x 200) 1,000,000
Warranty expense for the year
Warranty payments 750,000)
Warranty liability-December 31 900,000
3
Problem 2-6 (AICPA Adapted)
In 2018, Dubious Company began selling new line ofproducts that
carry a two-year warranty against defects.
Based upon past experience with other products, the entity estimated
warranty costs as a percentage ofpeso sales.
First year of warranty 2 %
Second year of warranty 5%

2018 2019
Sales 5,000,000 7,000,000
Actual warranty cost 100,000 300,000

1. What is the warranty expensefor 2018?

a. 350,000
b. 100,000
C. 175,000
d. 150,000

2. What is the warranty liability on December 31, 2018?

a. 150,000
b. 250,000
C. 125,000
d. 0

3. What is the warranty expense for 2019?

a. 300,000
b. 350,000
. 490,000
d. 140,000

4. What is the warranty liability on December 31, 2019?

a. 390,000
b. 440,000
C. 490,000
d. 840,000

24
Solution 2-6

Question l Answer c

Warranty expense for 2018 (5,000,000 x 7%) 350,000

Question 2 Answerb

Warranty expense for 2018 350,000

Warranty cost in 2018
(100,000)
Warranty liability - December 31, 2018 250,000
Question3 Answerc
Warranty expense for 2019 (7,000,000 x 7%) 490,000
Ouestion 4 Answser b

Waranty liability - December 31, 2018

250,000
Warranty expense for 2019 490,000
Total 740,000
Warranty cost in 2019 (300,000)
Warranty liability- December 31, 2019 440,000

25