CHAPTER 2: Premium Liability Premiums articles of value such as toys dishes silverware and other goods given to customers as result of past sales or sales promotion activities (even cash pays) •to stimulate sales •entities offer premiums to customer in return for coupons (e.g., wrappers, kaha, tansan etc.) •JEs 1. Sales Cash or AR Sales XXX XXX 2. premiums are purch Premiums Cash XXX XXX 3. premiums distributed to customer Premium expense XXX Premiums XXX •if there are remittances Cash Premium Expense Premiums XXX XXX XXX 4. estimated premium liab, end Premium Expense est premium liab, end XXX XXX •3 IMPORTANT COMPUTATIONS IN PREMIUM LIAB 1. Premium Expense expected no. of premium tb distributed during the yr multiply by: Premium expense per unit no. of units sold X expectations tb distr % no. of coupuns ÷ no of coupons required per premium expected no. of premium xxx % xxx xxx xxx cost of premium add: other cost less: any remittances prem expense per unit xx xx (xx) xx 2. Estimated Premium Liability est. premium liab, beg (from prev yr) prem. Expense during the yr prem distributed during the yr est premium liab, end xxx xxx (xxx) xxx (computed in 1 above) (no of prem actually dis during the yr ÷ no of coupouns required X prem exp per unit) 3. Premium Inventory (IAS 2) prem inv, beg cost of prem purch cost of prem distributed prem inv, end (computed by multiplying to COST of premiums) •not at prem exp pr unit above Cash Rebate Program •variation of premium offer •cash register receipts, bar codes, rebate coupons, other proof of purch, can be mailed to manufacturer for cash rebate •also to stimulate sales •estimated amt of rebate should be recogniezed both as exp and estimated liab in period of sale •JEs 1. recognize cash rebate program Rebate Expense Est rebate liab XXX XXX 2. record payment to customers estimated rebate liab cash XXX XXX •IMPORTANT COMPUTATIONS 1. Rebate Expense no. of units sold X expectations tb redeemed ÷ coupons required (if necessary) X cash rebate per coupon rebate expense xxx xxx xxx xxx xxx 2. Est rebate liab, end est rebate liab, beg (prev year, usually none) rebate expense rebate paid (actual) est rebate liab, end xxx xxx (xxx) xxx (diff from no. 2 JE above) •this is what's left after deducting redemeed portion •no. 2 JE above is the amt redeemed Cash Discount Coupon •another variation of premium offer •also to stimulate sales •exp and est liab is recog in period of sale for expected cash discount •JEs 1. to recog cash discount coupon offer Cash Discount Coupon expense Estimated coupon liab coupon face amt X expectation % coupon face amt tb redeemed ÷ coupons req to have 1 prem X other cost % (e.g., distribution) total coupon liability 2. Record payment to retailers Estimated coupon liab Cash xxx xxx xxx % xxx xxx % xxx xxx xxx Customer Loyalty Program •to build brand loyalty, retaub valuable customers and increase sales volume •also to stimulate sales •designed to reward customers for past purch and provide incentives for future purchases •if customer buys goods/services, entity grants customer an award credits or ''points'' •entity can redeem points by distributing free or discounted goods or services to customer •customers may be required to accumulate minimum no. of ''points'' before they can redeemed •measurement: - points are separate component of initial sale transac - granting of award credits is accounted as future delivery of goods or services -IFRS 15 entity shall allocate transac price to each performance oblig on a relative stand alone SP - stand alone SP is price which ent would sell a promised goods/services separately to customer •recognition: - initially as deferred revenue - subseq as revenue (when points are redeemed)