Problem 2-1 (IAA)

Miracle Company manufacturers a product that is packaged and sold. A plate is offered to customers
sending in three wrappers accompanied by a remittance of P10.

Data with respect to the premium offer are summarized below.

2021 2022
Sales 3,600,000 4,200,000
Purchase of premium, P50 per plate 390,000 580,000
Number of plates distributed as premiums 5,000 9,000
Estimated number of plates to be
distributed in subsequent period 2,000 3,000
Distribution cost P20 per plate

Required: Prepare journal entries that would be made in 2021 and 2022 to record sales, premium
purchases and redemptions, and year-end adjustments.

Answer:

Journal entries for 2021

Particular Debit Credit
Cash 3,600,000
Sales 3,600,000
To record the sales

Premium – plates 390,000

Cash 390,000
To record the purchase of premiums

Cash (5,000 x 10) 50,000

Premium Expense (5,000 x 40) 200,000
Premium Expense (5,000 x 50) 250,000
To record the distruted premiums

Premium Expense (5,000 x 20) 100,000

Cash 100,000
To record the redemption of 5,000 plates

Premium Expense (2,000 x 60) 120,000

Estimated premium liability 120,000
To record the liability for the premiums at the end of the first year

Journal entries for 2022

Particular Debit Credit
Estimated premium liability 120,000
Sales 120,000
To record the reversing of the premiums for 2021
 Cash 4,200,000
Sales 4,200,000
To record the sales

Premium – plates 580,000

Cash 580,000
To record the purchase of premiums

Cash 90,000
Premium Expense (9,000 x 40) 360,000
Premium Expense (9,000 x 50) 450,000
To record the distributed premiums

Premium Expense (9,000 x 20) 180,000

Cash 180,000
To record the redemption of plates

Premium expense(3,000 x 60) 180,000

Estimated premium liability 180,000
To record the liability for the premiums at the end of the second year

Problem 2-2(IAA)
Cascade Company manufactures a special laundry soap.

A towel is offered as a premium to customers who send in two

proof-of-purchase seals from the soap boxes and a remittance
of P20. Distribution cost is P5 per towel.

Data for the premium offer are.

2021 2022
Soap sales 2,500,000 3,125,000
Towel purchases, P100 per towel 175,000 200,000
Number of towels distributed as premium 1,000 1,800
Number of towels expected to be
distributed in subsequent period 600 800

Required:
1. Prepare journal entries for 2021 and 2022.
2. Statement classification of the account balances pertaining
to the premium plan.

Answer:
2021 Debit Credit
Cash 2,500,000
Sales 2,500,000
To record sales

Premium – towels 175,000

Cash 175,000
To record purchased of 1,750 towels

Cash (1,000 x 20) 20,000

Premium Expense 80,000
Premium – towels (1,000 x 100) 100,000
To record redemption of 1,000 premiums

Premium Expense (1,000 x 5) 5,000

Cash 5,000
To record distribution cost

Premium Expense (600 x 85) 51,000

Estimated premium liability 51,000
To record the liability for the premiums at the end of 2021

2022 Debit Credit

Estimated premium liability 51,000
Premium Expense 51,000
To reverse entry made on December 2021

Cash 3,125,000
Sales 3,125,000
To record 2022 sales

Premium – towels 200,000

Cash 200,000
To record purchase of 2,000 towels

Cash (1,800 x 20) 36,000

Premium Expense 144,000
Premium – towels (1,800 x 100) 180,000
To record redemtion of 1,800 premiums

Premium Expense (1800 x 5) 9,000

Cash 9,000
To record distribution cost

Premium Expense (800 x 85) 68,000

 Estimated premium liability 68,000
To record the liability for the premium at the end of 2022

Statement Classification 2021 2022

Current Asset:
Premium – towels 75,000 95,000
Current Liability:
Estimated Premium Liability 51,000 68,000
Selling Expense
Premium Expense 136,000 170,000

Problem 2-3 (IAA)

Pop Company Sells banana juice. In order to promote the drink among teenagers and others who might
otherwise be indifferent to the product, the entity inaugurated in the current year a premium plan
called "Drink-N-Win".

For every 10 bottle caps and P5 turned in, customers receive an attractive ball-pen and become eligible
for a grand prize of P5,000 in cash which is awarded for every 100 tops turned in.

The entity estimated that only 25% of bottle caps reaching the hands of customers will be presented for
redemption.

During the current year, the entity sold P400,000 bottles of banana juice at P9 each, purchased 10,000
ball-point pens for a total cost of P900,000, and incurred nondeferrable costs of P30,000 applicable to
the premium plan.

A total of 8,000 pens have been redeemed and thirty grand prizes have been awarded.

Required: Prepare journal entries to record the transactions relating to the premium plan for the current
year.

Answer:
Debit Credit
Cash (400,000 x 9) 3,600,000
Sales 3,600,000
To record sales

Premium – ball point pen 900,000

Cash 900,000
To record purchase of 10,000 ball point pens

Premium Expense 30,000

Cash 30,000
To record cost of premium plans (non-refundable)
 Cash (8,000 x 5) 40,000
Premium Expense (8,000 x 85) 680,000
Premium – ball point pen (8,000 x 90) 720,000
To record redemption of 8,000 pens

Premium Expense (2,000 x 85) 170,000

Estimated premium liability 170,000
To record premium liability

Bottle caps to be redeemed (400,000 x 25%) 100,000

Less: Bottle Caps redeemed (8,000 x 10) 80,000
Bottle caps outstanding 20,000
Premium to be distributed (20,000 / 10) 2,000

Premium Expense ( 30 x 5,000) 150,000

Cash 150,000
To record the payment of 30 grand prizes amounting to
5,000 each

Problem 2-4 (AICPA Adapted)

Topsy Company started a new promotional program. For every 10 box 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 Amount
Sales of product 100,000 30,000,000
Basketball purchased 5,500 4,125,000
Basketball distributed 4,000

Required:
Prepare journal entries to record the transactions relating to the premium plan for the current year

Answer:
Basketballs to be distributed ( 100,000 x 60% /10 ) 6,000
Basketballs distributed 4,000
Balance 2,000

Cost of basketball (4,125,000 / 5,500) 750

Premium Expense (6,000 x 750) 4,500,000

Estimated Liability (2,000 x 750) 1,500,000

Problem 2-5 (AICPA Adapted)
Victoria Company sells bed sheets for P3,000 per set. There is a promotion wherein if a customer buys 4
sets in a single transaction, the customer receives a coupon for one additional set for free. Customers
should go to the entity's website, fill out a request form, input the coupon number and submit online
before the expiration date. It is expected that 80% of the coupon will be redeemed.

During 2021, the entity sold 1,000 sets at P3,000 per set or P3,000,000. During 2022, the entity delivered
75 free additional sets.

Required:
1. Compute the stand-alone price of the coupons.
2. Allocate the transaction price to the products sold and the coupons.
3. Prepare journal entries for 2021 and 2022.
4. Compute the deferred revenue from coupons on December 31, 2022.

Answer:
The stand-alone price would be computed using the sales value of 4 bed sheets and probable
coups to be redeemed by the company. The coupon price is included in the selling price.

The stand alone price of coupon is P2,000

The transaction price of units sold and coupons are P2,500 per unit and P2,000 per coupon
respectively.

Working Note: Compute the stand-alone price of coupon and transaction price of units sold and
coupons as follows:

Computation for Stand Alone Price of Coupon and Transaction Price

Particulars Amount
Total Selling Price of 4 Bed Sheets (P3,000 x 4) 12,000
Total Units To be Considered (4 + 1 x 80%) 4.80
Transaction Price Per Bed Sheet (12,000 / 4.80 P2,500
Stand Alone Price of Coupon (P2,500 x 0.80) P2,000

Note: Coupon unit considered as 0.80 (1 x 80%) as only 80% of the total coupon are expected to
be redeemed (or used) by customers.

Record journal entries as follows:

Journal Entry
Date Particulars Debit Credit
31-Dec-21 Sales (P3,000 x 1,000) P3,000,000
Account Reveivable P3,000,000
(Being sales recorded)

31-Dec-21 Coupon Expense (P2,000 x 1,000 x ¼ ) P500,000

Deferred Revenue P500,000
(Being revenue expense and deferred revenue recorded)
31-Dec22 Deferred Revenue P150,000
Inventory P150,000
(Being revenue earned and recorded)

Problem 2-6 (IFRS)

Anton Company sells one dozen doughnuts for P500 per box. There is a promotion wherein if a
customer buys 3 boxes in a single transaction, a customer receives a coupon for one additional box for
free. Customers can redeem coupons at any time following the month of sale of the 3 boxes before the
expiration date. It is expected 60% of the customers will redeem the coupons.

During 2021, the entity sold 15,000 boxes at P500 per box or P7,500,000. During 2022, the entity
delivered 2,000 free additional boxes to the customers.

Required:
1. Compute the stand-alone selling price of the coupons
2. Allocate the transaction price to the products sold and the coupons.
3. Prepare the journal entry to record the sale of the products and issue of the free product coupons.
4. Prepare the journal entry to record the delivery of 2,000 free additional boxes.

Answer:

Problem 2-7
Sydney Company is a retailer that sells clothing. The entity has launched a promotional campaign
wherein if customers buy clothing with a single purchase of at least P12,000, the entity shall issue "30%
discount coupons" on selected items for 2 months following the campaign.

During the campaign, the entity sold clothing worth P3,240,000 and had issued 100 "30% discount
coupons".

It is expected that 80% of the coupons will be redeemed and customers using the coupons will buy
clothing at an average price of P15,000.
Required:
1. Compute the stand-alone selling price of the discount coupons.
2. Allocate the transaction price to the products sold and the discount coupons.
3. Prepare journal entries for the current year including the redemption of the coupons.

Answer:
1) Computation of Stand-alone selling price

Total Selling Price = Average Price x Discounted Rate x Expected discount Rate x Number of
coupons
= P15,000 x 30% x 80% x 100
= P 360,000

2) Allocation of Transaction Price

 Particular Total stand-alone Price Weight Allocation Price
Product P3,240,000 90% P2,916,000
Coupon P360,000 10% P36,000
Total P3,600,000 100% P2,952,000

3) Prepare Journal

S.No Particular Amount (P) Amount(P)

1) Cash 3,240,000

Sales 2,916,000

Deferred Revenue- coupon 36,000

2) Cash (15,000 x 70% x 80% x 100) 840,000

Deferred Revenue- coupon 36,000

Sales 876,000

Problem 2-8 (IFRS)

Nia Company is a retailer and has launched a promotional campaign wherein if customers buy clothing
with a single purchase of at least P4,000, the entity shall issue "40 discount coupons" on selected items.

The coupons may be used for 2 months following the campaign. During the campaign, the entity sold
clothing worth P1,860,000 and issued 100 "40% discount coupons."

The entity expects that 70% of the coupons will be redeemed and customers using the coupons buy
clothing at an average price of P5,000.

Required:
1. Compute the stand-alone price of the discount coupons.
2. Allocate the transaction price to the products sold and the discount coupons.
3. Prepare the journal entry to recognize the sale of the products and issue of discount coupons.
4. Prepare the journal entry to recognize the redemption of coupons.

Answer:
Total Selling Price = Average Price x Discounted Rate x Expected discount Rate x Number of
coupons

= 5,000 x 40% x 70% x 100

= 140,000
Particular Total stand-alone Price Weight Allocation Price
Product P1,860,000 90% P1,674,000
Coupon P140,000 10% P14,000
Total P2,000,000 100% P1,688,000

S.No Particular Amount (P) Amount(P)

1) Cash 1,860,000

Sales 1,674,000

Deferred Revenue- coupon 14,000

2) Cash (5,000 x 60% x 70% x 100) 210,000

Deferred Revenue- coupon 14,000

Sales 224,000

Problem 2-9 (IFRS)

Susan Company is a manufacturer of can shampoo and sells its product through local retailers.
The shampoo cost P550 to the retailer. Retailers sell the product to its customers and for each
product purchased by the customer, a coupon of P100 discount is given and may be used on
future purchase of the same product.

Retailers are reimbursed for the discount by the entity when customers redeem their coupons.
During the current year, the entity sold 8,000 products to local retailers at P550 each product or
P4,400,000. The entity expected that 75% of the coupons issued will be redeemed. At year end,
the entity paid the retailers P250,000 as reimbursement.

Required:
1. Compute the stand-alone selling price of the rebate coupons.
2. Allocate the transaction price to products sold and to the rebate coupons.
3. Prepare journal entries for the current year.
4. Compute the rebate liability at year-end.

Problem 2-10 (IFRS)

Isabel Company is a manufacturer of deodorant and sells its product through local retailers. The
deodorant costs P64 to the retailer. Retailers sell the product to its customers and for each
product purchased by the customer, a coupon of P20 discount is given and may be used on
future purchases of the same product.

Retailers are reimbursed for the discount by the manufacturer when customers redeem their
coupons.
During the current year, the entity sold 10,000 deodorants to the local retailers at P64, each or
P640,00. The entity expected that 80% of the coupons issued will be redeemed. At year end, the
entity paid the retailers P50,000 as reimbursement.

Required:
1. Compute the stand-alone selling price of the rebate coupons.
2. Allocate the transaction price between the products sold and the rebate coupons.
3. Prepare journal entries for the current year.

Problem 2-11 (IFRS)

Marie Company sells gift certificates worth P2,500,000 to customers in exchange for future
delivery of its product.

The gift certificates are nonrefundable by the customer and the entity expects that 5% of the gift
certificates will not be redeemed.

During the current year, the entity redeemed gift certificates worth P1,425,000.

Required:
1. Compute the expected value of breakage.
2. Compute the expected value of gift certificate to be redeemed.
3. Compute the breakage revenue.
4. Prepare the journal entries to recognize the sale of gift certificates and the redemption of gift
certificates.

Problem 2-12(IFRS)
Shawn Company sells gift certificates worth P8,000,000 to customers in exchange for future
delivery of its product.

The gift certificates are nonrefundable by the customer and the entity expects that 15% of the
gift certificates will not be redeemed.

During the current year, the entity redeemed gift certificates worth P2,975,000.

Required:
1. Compute the expected value of breakage.
2. Compute the expected value of gift certificates to be redeemed.
3. Compute the breakage revenue.
4. Prepare the journal entries to record the sale of gift certificates and the redemption of gift
certificates.

Problem 2-13(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 groceries. The points have no expiry date.
During 2021, the sales amounted to P7,000,000 based on stand-alone selling price. During the
year, the entity granted 10,000 points. But management expects that only 80% or 8,000 points
will be redeemed. The stand-alone selling price of each loyalty point was estimated at P100.

On December 31, 2021, 4,800 points were redeemed. In 2022, management revised its
expectations and now expected that 90% or 9,000 points will be redeemed altogether. During
2022, the entity redeemed 2,400 points.

Required: Prepare journal entries for 2021 and 2022.

Answer:
Product sales 7,000,000
Point granted during the year (10,000 x 100) 1,000,000
Total 8,000,000

Product sales (7,000,000/8,000,000x7,000,000) 6,125,000

Points (1,000,000/8,000,000x7,000,000) 875,000
Total transaction price 7,000,000

Product sales 6,125,000

Revenue from points redeemed in 2021
(4,800/8,000x875,000) 525,000
Total revenue in 2021 6,650,000

Cash 7,000,000
Sales 6,125,000
Unearned revenue – pts. 875,000
Unearned revenue – pts. 525,000
Sales 525,000

Pts redeem in 2021 4,800

Pts redeem in 2022 2,400
Total pts redeem 12/31/22 7,200

Cumulative revenue on 12/32/22

(7,200/9,000x875,000) =700,000
Revenue from pts recognized 2021= 525,000
Revenue from pts earn in 2022 = 175,000

Unearned revenue – pts. 175,000

Sales 175,000

Problem 2-14(IFRS)
Erika Company operates a customer loyalty program. The entity grants loyalty points for good
purchased. The loyalty points can be used by the customers in exchange for goods of the entity.
The points have no expiry date.
During 2021, the entity issued 50,000 award credits and expected that 80% of these award
credits shall be redeemed.

The stand-alone selling price of the award credits granted is reliably measured at P1,000,000. In
2021, the entity sold goods to customers for a total consideration of P7,000,000 based on stand-
alone selling price. The award credits redeemed and the total award credits expected to be
redeemed each year are:

Redeemed Expected to be redeemed

2021 15,000 80%
2022 7,950 85%
2023 2,550 85%
2024 15,000 90%

Required: Prepare journal entries for 2021, 2022, 2023 and 2024.

Answer:
2021
Product sales = 7,000,000
Points – stand – alone selling price = 1,000,000
Total = 8,000,000

Cash 7,000,000
Sales (7,000,000/8,000,000)x7,000,000 6,125,000
Unearned revenue pts(1,000,000/8,000,000)x7,000,000 875,000

Unearned revenue pts 328,125

Sales 328,125
(15,000/40,000) 875,000

Pts to be redeemed (80%x50,000) 40,000

Revenue to be recognized in 2021 (15,000/40,000)x875,000 328,125

2022
Unearned revenue pts 144,375
Sales 144,375

Pts to be redeemed (85%x50,000) 42,500

Total pts to be redeemed 12/31/22 (15,000+7950) 22,950

Cumulative revenue 12/31/22 (22,950/42,500)x875,000 472,500

Revenue recognized in 2021 328,125
Revenue to be recognized in 2022 144,375

2023
Unearned revenue pts 52,500
Sales 52,500
 Pts to be redeemed (85%x50,000) 42,500
Total pts to be redeemed 12/31/23 (15,000+7,950+2,550) 25,500

Cumulative revenue 12/31/23 (22,500/42,500)x875,000 525,000

Revenue recognized in 2022 472,500
Revenue to be recognized in 2023 52,500

2024
Unearned revenue pts 262,500
Sales 262,500

Pts to be redeemed (90%x50,000) 45,500

Total pts to be redeemed 12/31/22 (15,000+7,950+2,550+15,000) 40,500

Cumulative revenue 12/31/24 (40,500 /45,000)x875,000 787,500

Revenue recognized in 2023 525,000
Revenue to be recognized in 2024 262,500

Problem 2-15 (AICPA Adapted)

In an effort to increase sales, Mill Company inaugurated a sales promotional campaign on June
30. 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, 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?

a. 640,000 b. 384,000 c. 240,000 d. 160,000
2. What amount should be reported as estimated premium liability on December 31?
a. 169,000 b. 224,000 c. 288,000 d. 384,000

Answer:
1: B
2: B
Coupons to be redeemed (160,000x60%) 96,000
Less:Coupons redeemed 40,000
Coupons outstanding 56,000

Premium expense (96,500/5)x20 384,000

Estimated liability (56,500/5)x20 224,000
Problem 2-16(AICPA Adapted)