PREMIUMS

Problem 2-6 (AICPA Adapted)

In an effort to increase sales, Mill Company inaugurated a sales promotional campaign on June 30, 2020. The entity
placed a coupon redeemable for a 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 entity estimated that only 60% of the coupons issued will
be redeemed. For the six months ended December 31, 2020, the following information is available:

Packages of cereal sold 160,000

Premiums purchased 12,000
Coupons redeemed 40,000
1. What amount should be reported as premium expense for 2020?
a 640,000
b. 384,000
c. 240,000
d. 160,000

2. What is the estimated liability for premium claims outstanding on December 31, 2020?
a. 169,000
b. 224,000
c. 288,000
d. 384,000

Problem 2-7 (AICPA Adapted)

During 2020, 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 of P40. The entity paid P50 per pan and P5
for handling and shipping. The entity estimated that 80% of the coupons will be redeemed, even though only 300,000
coupons had been processed during 2020.

1. What amount should be reported as premium expense for 2020?

a. 6,000,000
b. 7,500,000
c. 4,500,000
d. 2,000,000

What amount should be reported as liability for unredeemed coupons on December 31, 2020?
a. 1,000,000
b. 1,500,000
c. 3,000,000
d. 5,000,000

Problem 2-8 (AICPA Adapted)

Topsy Company started a promotional program. For every 10 box tops returned, customers receive a basketball. The
entity estimated that only 60% of the box tops reaching the market will be redeemed.
The entity provided the following information:

Units
5,500
4,000
Sales of product Basketball purchased
Basketball distributed

What is the amount of year-end estimated liability associated with this promotion?
a 4,125,000
b. 1,500,000
c. 3,000,000
d. 4,500,000

Problem 2-9 (AICPA Adapted)

Cereal Company frequently distributes coupons to promote new products. On October 1, 2020, the entity mailed
100,000 coupons for P45 off each box of cereal purchased and expected 12,000 of these coupons to be redeemed
before the December 31, 2020 expiration date. It takes 30 days from the redemption date for the entity to receive the
coupons from the retailers. The entity reimburses the retailers an additional P5 for each coupon redeemed.

On December 31, 2020, the entity had paid retailers P250,000 related to these coupons and had 5,000 coupons on hand
that had not been processed for payment.

What amount should be reported as liability for coupons on December 31, 2020?
a. 350,000
b. 290,000
c. 250,000
d. 225,000

Problem 2-10 (AICPA Adapted)

In packages of the products, Curran Company included coupons that may be presented at retail stores to obtain
discounts. Retailers are reimbursed for the face amount of coupons redeemed plus 10% of that amount for handling
costs. The entity granted requests for coupon redemption by retailers up to three months after the consumer expiration
date. The entity estimated that 70% of all coupons issued will ultimately be redeemed.
Consumer expiration date
December 31, 2020
Total face amount of coupons issued Total payments to retailers as of December 31, 2020

1. What amount should be reported as premium expense for 2020?

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, 2020?

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

Problem 2-11 (IAA)

In December 2020, Milan Company began including coupon in each package of candy that it sold and offering a toy in
exchange for P50 and five coupons. The toys cost P80 each. Eventually, 60% of the coupons will be redeemed.
During December, the entity sold 110,000 packages of candy and no coupons were redeemed.
On December 31, 2020, what amount should be reported as estimated liability for coupons?

a. 198,000
b. 396,000
c. 528,000
d. 660,000

Problem 2-12 (AICPA Adapted)

Blake Company mails coupons to consumers which may be presented at a stated expiration date at retail food stores to
obtain discounts on certain Blake products. Retailers are reimbursed for the face value of coupons. redeemed, plus 10%
of coupon face value as compensation for handling costs. The entity honors requests for coupon redemption by retailers
received up to three months after the consumer expiration date. Based on experience, 60% of the coupons issued
ultimately are redeemed. The entity provided the following following information with respect to two separate series of
coupons issued during 2020: Consumer expiration date June 30, 2020 December 31, 2020 Total face value of coupons
issued 1,000,000 Total payments to retailers December 31, 2020 on

What amount should be reported as liability for unredeemed coupons on December 31, 2020?
a. 970,000
b. 915,000
c. 795,000
d. 0

Problem 2-13 (IAA)

Clam Company offers customers a pottery cereal bowl if they send in three boxtops from its products and P10. The
entity estimated that 60% of the boxtops will be. redeemed. During the current year, the entity sold 675,000 boxes and
customers redeemed 330,000 boxtops receiving 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. What is the liability for outstanding premiums at year-end?

a. 250,000
b. 375,000
c. 625,000
d. 875,000
Problem 2-14 (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 P50 as a promotion during the current year. The cost of the 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. at

What amount should be reported as estimated liability year-end?

a. 250,000
b. 375,000
c. 625,000
d. 875,000

Problem 2-15 (IAA)

A towel was offered as a premium to customers who send in 10 coupons and a remittance of P10. Charlene Company
included Distribution cost of premium is P5. Experience indicated that only 30% of the coupons will be redeemed.
laundry soap sold. one coupon in each box of Boxes of soap sold Number of towels purchased at P50 each Coupons
redeemed 50,000

1. What is the premium expense for 2020?

a. 2,500,000
b. 2,400,000
c. 1,800,000
d. 2,700,000

2. What is the premium liability on December 31, 2020?

a. 1,000,000
b 1,100,000
C. 800,000
d. 900,000

3. What is the premium expense for 2021?

a. 3,000,000
b. 3,750,000
c. 3,375,000
d. 4,000,000

4. What is the premium liability on December 31, 2021?

a. 1,000,000
b. 1,250,000
c. 1,125,000
d. 1,375,000

Problem 2-16 (IAA)

Love Company included one coupon in each package of cereal sold. A towel was offered as a premium to customers who
send in 10 coupons.
2020
Packages of cereal sold 30,000 20,000
Number of towels purchased at P40 per towel Number of towels distributed as premium
Number of towels to be distributed as premium next period
60,000
50,000
5,000
2021
3,000

1. What is the premium expense for 2020?

a. 1,000,000
b. 1,200,000
C. 600,000
d. 500,000

2. What is the premium liability on December 31, 2020?

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

3. What is the premium expense for 2021?

a. 2,400,000
b. 2,000,000
c. 2,120,000
d. 1,920,000

4. What is the premium liability on December 31, 2021?

a. 320,000
b. 400,000
c. 120,000
d. 520,000

Problem 2-17 (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% of the
coupons will be redeemed, even though only 35,000 coupons had been processed during the current year. At year-end,
What amount should be reported as estimated rebate liability?
a. 1,750,000
b. 1,050,000
c. 1,225,000
d. 0

Problem 2-18 (IAA)

During the current year, Jolly Company offered a P20 cash rebate coupon to customers who purchased one of its new
line of products. The entity sold 10,000 of these products during the current year. By year-end, 7,600 of the rebates had
been claimed and 7,100 had been paid. The historical experience with such rebates indicated that 85% of customers
claim the rebates.

What amount should be reported as rebate expense for the current year?
a. 142,000
b. 152,000
c. 170,000
d. 200,000

Problem 2-23 Multiple choice (IAA)

1. The cost of customer premium offer should be charged to expense

a. When the related product is sold.
b. When the premium offer expires.
c. Over the life cycle of the product to which the premium relates.
d. When the premium is claimed.

2. The accounting concept that requires recognition of a liability for customer premium offer is AHD
a. Time period
b. Prudence
c. Historical cost
d. Matching principle

3. Accounting for cost of incentive program for frequent customer purchases involves
a. Recording an expense and a liability each period.
b. Recording a liability and a reduction of revenue each period.
c. Recording an expense and an asset reduction each period.
d. Recording an expense and revenue each period.

4. Accounting for cost of incentive program for customer purchases

a. Requires probability estimation.
b. Follows the matching principle.
c. Is a loss contingency situation.
d. All of these are correct.

5. Providing a monetary rebate program

a. Is accounted for similarly to a premium offer
b. Creates an expense for the seller in the period
c. Creates a liability for the seller at the time of sale.
d. All of these are correct.
WARRANTY

Problem 3-8 (IAA)

Hanna Company reported warranty expense of P1,900,000 for the current year. The warranty liability account increased
by P200,000 during the year.
What amount was incurred for warranty expenditures during the year?
a. 1,900,000
b. 1,700,000
c. 2,100,000
d. 0

Problem 3-9 (IAA)

Pink Company had a warranty liability of P350,000 at the beginning of current year and P310,000 at end of current year.
Warranty expense is based on 4% of sales which amounted to P50,000,000 for the year.
What amount of warranty expenditures was incurred for the current year?
a. 2,040,000
b. 1,900,000
c. 2,000,000
d. 0

Problem 3-10 (IAA)

Carpet Company had a balance of P800,000 in the warranty liability account on December 31, 2020. The warranty
expenditures totaled P2,500,000 for 2021. The warranty expense is calculated at 6% of sales. Sales amounted to
P40,000,000 for 2021.
What was the balance in the warranty liability account on December 31, 2021?
a. 2,400,000
b. 3,200,000
c. 700,000
d. 800,000

Problem 3-11 (AICPA Adapted)

Mile Company sells washing machines that carry a three-year warranty against manufacturer's defects. Based on entity
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?
a. 170,000
b. 240,000
c. 550,000
d. 720,000

2. What is the warranty liability at year-end?

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

Problem 3-12 (AICPA Adapted)

Bold Company estimated annual warranty expense at 2% of annual net sales. The net sales for the current year
amounted to P4,000,000.
At the beginning of current year, the warranty liability was P60,000 and the warranty payments during the current year
totaled P50,000.

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

a. 70,000
b. 50,000
c. 80,000
d. 60,000

2. What is the warranty liability at year-end?

a. 10,000
b. 70,000
c. 80,000
d. 90,000
Problem 3-13 (AICPA Adapted)
On April 1, 2020, Ash Company began offering a new product for sale under a one-year warranty. Of the 50,000 units in
inventory at April 1, 2020, 30,000 had been sold by June 30, 2020. Based on experience with similar products, the entity
estimated that the average warranty cost per unit sold would be P80.
Actual warranty costs incurred from April 1 through June 30, 2020 totaled P700,000.

1. What is the warranty expense for 2020?

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

2. On June 30, 2020, what amount should be reported as estimated warranty liability?
a. 1,600,000
b. 3,300,000
c. 1,700,000
d. 900,000

Problem 3-14 (AICPA Adapted)

Villa Company estimated annual warranty expense at 8% of net sales. The following data relate to the current year:
Warranty liability, January 1 Before adjustment
After adjustment
100,000 debit
540,000 credit

What is the amount of net sales for the current year?

a. 8,000,000
b. 6,750,000
c. 5,500,000
d. 1,250,000

Problem 3-15 (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:
2020
2021
3,000,000
Net sales
2,500,000 45,000
50,000
Total repair costs incurred

What amount should be reported as warranty expense for 2021?

a. 60,000
b. 50,000
c. 10,000
d. 59,000

Problem 3-16 (IAA)

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 of the 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 warranty liability at year-end?

a. 250,000
b. 350,000
c. 900,000
d. 750,000

Problem 3-17 (AICPA Adapted)

In 2020, Dubious Company began selling new line of products that carry a two-year warranty against defects. Based
upon past experience with other products, the entity estimated warranty costs as a percentage of peso sales.
First year of warranty Second year of warranty 2% 5%
2021
Sales
2020
2021?
Actual warranty cost

1. What is the warranty expense for 2020?

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

2. What is the warranty liability on December 31, 2020?

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

3. What is the warranty expense for 2021?

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

4. What is the warranty liability on December 31, 2021

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

Problem 3-18 (AICPA Adapted)

During 2020, Namnama Company introduced a new product carrying a two-year warranty against defects. The
estimated warranty costs related to peso sales are 4% within 12 months following sale and 6% in the second 12 months
following sale.
The entity reported sales of P5,000,000 for 2020 and P6,000,000 for 2021.
The actual expenditures incurred amounted to P150,000 for 2020 and P550,000 for 2021.

1. What is the warranty expense for 2020?

a. 500,000
b. 200,000
c. 250,000
d. 300,000

2. What is the estimated warranty liability on December 31, 2020?

a. 350,000
b. 150,000
c. 100,000
d. 50,000

3. What is the warranty expense for 2021?

a. 650,000
b. 600,000
c. 500,000
d. 550,000

4. What is the estimated warranty liability on December 31, 2021?

a. 360,000
b. 400,000
c. 240,000
d. 100,000

Problem 3-19 Multiple choice (IAA)

1. The accrual approach in accounting for warranty
a. Is required for income tax reporting.
b. Is frequently justified on the basis of expediency.
c. Finds the expense account being charged when the seller performs in compliance with the warranty.
d. Represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the
sale.
2. Which of the following best describes the accrual approach of accounting for warranty cost?
a. Expensed when paid
b. Expensed when warranty claims are certain
c. Expensed based on estimate in year of sale
d. Expensed when incurred

3. Which of the following best describes the expense as incurred approach of accounting for warranty cost?
a. Expensed based on estimate in year of sale
b. Expensed when liability is accrued
c. Expensed when warranty claims are certain
d. Expensed when incurred

4. What is the classification of the estimated warranty liability in a three-year warranty?

a. Noncurrent
b. Current
c. Partly current and partly noncurrent
d. No need for disclosure

5. Which of the following is a characteristic of the accrual of warranty but not the sale of warranty?
a. Warranty liability
b. Warranty expense
c. Unearned warranty revenue
d. Warranty revenue