Chapter 2 Premium Liab PDF

Preview

Summary

Download Chapter 2 Premium Liab PDF

Description

Angeles University Foundation | Bachelor of Science in Accountancy

PREMIUM LIABILITY

CPA

Premiums  Goods given to customers as a result of past sales or sales promotion activities  Entities offer premiums to customers in return for product labels, box tops, wrappers, and coupons

Cash

of

4,000

8,000

Premium Expense 32,000 Premiums-soup bowls

40,000

(4,000 wrappers / 5 = 800 bowls distributed)

To record the liability for the premiums at the end of the first year:

When the premiums are distributed to customers:

Premium Expense

16,000

Estimated premium liability

16,000

xxx

Computation

xxx

Wrappers to be redeemed (60% x 10,000 wrappers)

6,000

Less: Wrappers redeemed

4,000

Balance

2,000

Premiums to be distributed (2,000 / 5)

400

At the end of the year, if premiums are still outstanding: Premium Expense

Cash

redemption

(800*50)

xxx

Premiums

the

(800*40 = 32,000)

xxx

Premium Expense

To record wrappers:

(800*10=8,000)

When the premiums are purchased: Premiums

The goal is to earn the title

xxx

Estimated Liability (400 x 40)

Estimated Premium Liability

xxx

Illustration An entity manufactures a certain product and sells it at 300 per unit. A soup bowl is offered to customers on the return of 5 wrappers plus a remittance of 10. The bowl costs 50, and it is estimated that 60% of the wrappers will be redeemed. Sales 10,000 units @ 300

3,000,000

Soup bowls purchased, 2,000 units @ 50 100,000 Wrappers redeemed

4,000

To record the sales: Cash 3,000,000 Sales 3,000,000 To record the purchase of the premiums: Premiums-soup bowls 100,000 Cash 100,000

VAM | Values - Attitude - Motivation

16,000

Financial Statement classification Current asset- Premium soup bowls

60,000

Current Liability- Estimated premium Liability

16,000

Distribution- Premium Expense

48,000

Cash rebate program  Variation of premium offer  Cash register receipt, bar codes, rebate coupons and other proof of purchase  The amount should be recognized both as an expense and an estimated liability in the period of sales Illustration An entity offered 500 cash rebate on a particular model of TV set. The customers must present a rebate coupon enclosed in every package sold plus the official receipt. Past experience indicates that 40% of the coupons will be redeemed. During the current year, the entity sold 4,000 TV sets and total payments to customer amounted to 450,000.

Angeles University Foundation | Bachelor of Science in Accountancy

PREMIUM CPA

LIABILITY

The goal is to earn the title

To recognize the cash rebate program:

(30% x 5,000,000)

Rebate Expense

Multiply by (100% face plus 10% handling)

800,000

Estimated rebate liability 800,000

Total coupon liability

110% 1,650,000

To record payment to retailers: To record the payments to the customers: Estimated rebate liability

450,000

Cash

450,000

Rebate coupon issued

4,000

Expected to be redeemed

40%

Estimated coupon liability Cash

1,100,000 1,100,000

Customer Loyalty Program-IFRS 15  To build brand loyalty  Retain their valuable customers

Coupon rebates to be redeemed 1,600

 Increase sales volume

Cash rebate per coupon

500

Estimated rebate liability

800,000

 Rewards customers for past purchase and to provide them with incentives to make further purchases Measurement

Cash discount coupon

 Future delivery of goods or services

 Variation of the premium offer  Popular marketing tool for the purpose of stimulating sales

 An entity shall allocate the transaction price to each performance obligation identified in contract on a relative standalone selling price basis

 The amount should be recognized both as an expense and an estimated liability in the period of sales

Stand-alone selling price

Illustration During the current year, an entity inserted in each package sold a coupon offering 300 off the purchase price of a particular brand of product when the coupon is presented to retailers.

 The price at which an entity would sell a promised good or service separately to a customer Recognition Initial- Deferred Revenue

The retailers are reimbursed for the face amount of coupons plus 10% for handling. Previous experience indicates that 30% of coupons will be redeemed.

Subsequent- Revenue when the award credits are redeemed

During the current, the entity issued coupons with face amount of 5,000,000 and total payments to retailers amounted 1,100,000

The amount of revenue recognized shall be based on the number of awards credits that have been redeemed relative to the total number expected to be redeemed.

To recognize the cash discount coupon offer: Cash discount expense

1,650,000

Estimated coupon liability

1,650,000

The calculation of the revenue to be recognized in any one period is made on a “cumulative basis” in order to reflect the changes in estimate.

Illustration FA of coupons to be redeemed VAM | Values - Attitude - Motivation

1,650,000

2020 Sales (stand-alone selling price)

9,000,000

Angeles University Foundation | Bachelor of Science in Accountancy

PREMIUM CPA

LIABILITY

Customer points’ earned

10,000

Unearned revenue-points

80% of these points will be redeemed

On December 31, 2020, 4,000 points have been redeemed in exchange for groceries In 2021, the management revised expectations and now expects that 90% points will be redeemed altogether. During 2021, the entity redeemed 4,100 points. In 2021, a further 900 points are redeemed Management continues to expect that only 9,000 points will be ever redeemed, meaning, no more points will be redeemed after 2022.

Allocation of transaction price Product sales 9,000,000 selling

price(10,000

x

100)

Total

10,000,000

Product Sales

8,100,000

Points

900,000

Total transaction price

9,000,000

9,000,000/10,000,000 x 9,000,000 = 8,100,000 1,000,000/10,000 x 9,000,000 = 900,000

Journal Entries The initial sale in 2020 is recorded as follow: Cash

9,000,000 Sales

8,100,000

unearned revenue-points900,000

Redemption of 4,000 points in 2020 Unearned revenue-points 450,000 Sales

450,000

Revenue to be recognized in 2020 - (4,000/8,000 x 900,000)

Redemption of 4,100 points in 2020 VAM | Values - Attitude - Motivation

360,000

Sales 360,000

Stand-alone selling price of each loyalty point 100

Points stand-alone 1,000,000

The goal is to earn the title

Points redeemed in 2020

4,000

Points redeemed in 2021

4,100

Total points redeemed to December 31, 2021

8,100...