AE 16: INTERMEDIATE ACCOUNTING 2
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Module 2: Premiums
What are Premiums?
Premiums are articles of value such as toys, dishes, silverware, and other goods given to customers
as a result of past sales or sales promotion activities.
In a marketing sales strategy to increase sales of products, entities offer premiums to customers in
return for product labels, box tops, wrappers, and coupons.
Accordingly, WHEN THE MERCHANDISE IS SOLD, an accounting liability for future distribution of
the premium arises and should be given accounting recognition.
Accounting Procedures:
(1) When premiums (items to be given as prizes) are purchased:
Premiums
xxx
Cash
xxx
(2) When the premiums are distributed to customers:
Premium Expense
xxx
Premiums
xxx
(3) At the end of the year, if premiums are still outstanding:
Premium Expense
xxx
Estimated Premium Liability
xxx
ILLUSTRATIONS
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An entity manufactures a certain product and sells it at P300 per unit.
A soup bowl is offered to customers on the return of 5 wrappers plus a remittance of P10.
The bowl costs P50 and it is estimated that 60% of the wrappers will be redeemed.
The data for the first year concerning the premium plan are summarized below:
Sales - 10,000 units at P300 each
3,000,000
Soup bowls purchased - 2,000 units at P50 each
100,000
Wrappers redeemed
4,000
Accounting Entries:
(1) To record the sales:
Cash
Sales
3,000,000
3,000,000
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(2) To record the purchase of the premiums:
Premiums - soup bowls
100,000
Cash
100,000
(3) To record the redemption of 4,000 wrappers:
Cash (800*P10 redemption price)
8,000
Premium Expense (800*P40)
32,000
Premiums - soup bowls (8,000 + 32,000)
40,000
4,000 wrappers / 5 wrappers = 800 bowls to be distributed.
50 bowls - 10 redemption price = 40/bowl
(4) To record the liability at the end of the 1st year:
Premium Expense
16,000
Estimated Premium Liability
16,000
Wrappers to be redeemed (60% x 10,000 wrappers)
6,000
Less: Wrappers redeemed
4,000
Balance
2,000
Divide by bo. Of wrappers to redeem
5
Premiums to be distributed
400
Multiply by cost per bowl
40
Estimated liability
16,000
(5) At the end of the year, the accounts related to the premium plan are classified and presented in
the financial statements as follows:
Balance Sheet
Current Asset:
Premiums - soup bowls
60,000
Current Liability:
Estimated Premium Liability
16,000
Income Statement
Distribution (Selling) Cost
Premium Expense
48,000
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WHAT ARE CASH REBATE PROGRAMS?
It is another kind of premium program that promotes sales where a cash refund is given to the
customer upon submission of certain documents as proof of purchase.
Cash register receipts, bar codes, rebate coupons, and other proof of purchase often can be mailed
to the manufacturer for cash rebates.
Accounting Recognition Of Cash Rebates:
➔ Estimated amount of cash rebate should be recognized both as an EXPENSE AND AN
ESTIMATED LIABILITY IN THE PERIOD OF SALE.
ILLUSTRATION:
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An entity offered P500 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 customers amounted to
P450.000
Accounting Entries:
(1) To recognize the cash rebate program:
Rebate Expense
800,000
Estimated Rebate Liability
800,000
Rebate coupons issued
4,000 (TV set sold)
Expected to be redeemed
40% (redemption experienced)
Coupon rebates to be redeemed (4,000*40%)
1,600
Cash rebate per coupon
500 (cash rebate per TV set sold)
Estimated rebate liability (1,600*500)
800,000
(2) To record payments to customer:
Estimated Rebate Liability
Cash
450,000
450,000
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What is the accounting treatment for Cash Discounts?
Similarly, with the premium offer and cash rebates, an expense and an estimated liability for the
expected cash discount shall be recognized in the period of sale.
ILLUSTRATION:
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During the current year, an entity inserted in each package sold a coupon offering P300 off the
purchase price of a particular brand of product when the coupon is presented to retailers.
The retailers are reimbursed for the face amount of coupons plus 10% for handling.
Previous experience indicates that 30% of coupons will be redeemed.
During the current year, the entity issued coupons with face amount of P5,000,000 and total
payments to retailers amounted to P1,100,000.
Accounting Entries:
(1) To recognize the cash discount coupon offer:
Cash Discount Coupon Expense
Estimated Discount Coupon Liability
1,650,000
1,650,000
Discount coupon issued at face amount
5,000,000
Estimated redemption based on experienced
30%
Face amount of coupons to be redeemed
1,500,000
Multiply by (100% redemption + 10% handling)
110%
Total coupon liability
1,650,000
(2) To record payments to retailers:
Estimated Discount Coupon Liability
Cash
Estimated Coupon Liability at the end of the
year
1,100,000
1,100,000
550,000
(1,650,000 - 1,100,000)
What is CUSTOMER LOYALTY PROGRAM (Credit Points Award System)?
Designed to reward customers for past purchases by providing them with incentives to make further
purchases.
Supports marketing strategy of building brand loyalty, retain valuable customers and increase sales
volume.
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How does CUSTOMER LOYALTY PROGRAM work?
When a customer buys goods or services, AWARD CREDITS or "POINTS" are given.
Customer can redeem the "points" by granting the customer free or discounted goods or services.
Customers may be required to accumulate a specified number of award credits or points before
redemption.
MEASUREMENT OF AWARD CREDITS OR POINTS
Accounted for as a "SEPARATE COMPONENT OF THE INITIAL SALE TRANSACTION."
Accounted as "FUTURE DELIVERY OF GOODS OR SERVICES."
IFRS 15, Par 74 provides that an entity shall allocate the transaction price to each performance
obligation identified in a contract on a relative stand-alone selling price basis.
The fair value of the consideration received with respect to the initial sale shall be allocated between
the award credits and the sale based on relative stand-alone selling price.
The stand-alone selling price is the PRICE AT WHICH AN ENTITY WOULD SELL A PROMISED
GOOD OR SERVICE SEPARATELY TO A CUSTOMER.
RECOGNITION
The consideration allocated to the award credits is INITIALLY recognized as DEFERRED REVENUE
and SUBSEQUENTLY recognized as REVENUE WHEN the AWARD CREDITS are REDEEMED.
The amount of revenue recognized shall be based on the number of award credits that have been
redeemed relative to the total number expected to be redeemed.
The estimated redemption rate is assessed each period.
Changes in the total number expected to be redeemed do not affect the total consideration for the
award credits.
The changes in the total number of award credits expected to be redeemed shall be reflected in the
amount of revenue recognized in the current and future periods.
periods.
The calculation of the revenue to be recognized in any one period is made on a "cumulative bases"
in order to reflect the changes in the estimate.
ILLUSTRATION 1
➔ A grocery retailer operates a customer loyalty program.
➔ The grocery 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 expiry date.
➔ The sales during 2020 amounted to P9,000,000 based on stand-alone selling price.
➔ During 2020, the customers earned 10,000 points.
➔ Management expects that 80% or 8,000 of these points will be redeemed.
➔ The stand-alone selling price of each loyalty point is estimated at P100.
➔ 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% or 9,000 points will be
redeemed altogether.
➔ During 2021, the entity redeemed 4,100 points. In 2022, a further 900 points are redeemed.
➔ Management continues to expect that only 9,000 points will ever be redeemed, meaning, no more
points will be redeemed after 2022.
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COMPUTATIONS:
ALLOCATION OF TRANSACTION PRICE
Product Sales
9,000,000
Points-stand-alone selling price (10,000 * 100)
1,000,000
Total
10,000,000
ALLOCATION OF SALES
Product Sales (9,000,000/10,000,000*9,000,000)
8,100,000
Points (1,000,000/10,000,000*9,000,000
900,000
Total Transaction Price
9,000,000
Accounting Entries:
(1) Initial sale in 2020:
Cash
9,00,000
Sales
8,100,000
Unearned Revenue - Points
900,000
(2) Redemption of 4,000 points in 2020:
Unearned Revenue - Points
Sales
Revenue to be recognized in 2020:
450,000
450,000
4,000 / 8,000 * 900,000 = 450,000
(3) Redemption for 4,100 points in 2021:
Unearned Revenue - Points
Sales
360,000
360,000
Points redeemed in 2020:
4,000
Points redeemed in 2021:
4,100
Tota points redeemed to Dec. 31, 2021
8,100
Cumulative Revenue on Dec. 31, 2021
(8,100 / 9,000 * 900,000)
810,000
Revenue recognized in 2020
(450,000)
Revenue recognized in 2021
360,000
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(4) Redemption of 900 points in 2022:
Unearned Revenue - Points
90,000
Sales
90,000
Points redeemed in 2020:
4,000
Points redeemed in 2021:
4,100
Points redeemed in 2022:
900
Total points redeemed to Dec. 31, 2021
9,000
Cumulative Revenue on Dec. 31, 2022
(9,000 / 9,000 * 900,000)
900,000
Revenue recognized in 2021
(810,000)
Revenue recognized in 2022
90,000
ILLUSTRATION 2 - 3rd Party Operates Loyalty Program
➔ A retailer of electrical goods participates in a customer loyalty program operated by an airline.
➔ The retailer grants program members one air travel point for every P1,000 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 a stand-alone selling price and granted 5,000 points with a stand-alone selling price of P100 for
each point.
SOLUTION:
SELLING PRICE
FRACTION
ALLOCATION
4,500,000
0.90
4,050,000
500,000
0.10
450,000
Product Sales
Points (5,000 * 100)
5,000,000
Revenue from points
450,000
Payments for Airline (5,000 * 60)
(300,000)
Net revenue from points
150,000
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The entity has fulfilled its obligation by granting the points.
Therefore, revenue from points is recognized when the electrical goods are sold.
4,500,000
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Accounting Entries:
(1) To record initial sale:
Cash
4,500,000
Sales
4,050,000
Revenue from points
450,000
(2) To record payment to the airline:
Loyalty Program expense
Cash
300,000
300,000