CHAPTER 2 – PREMIUMS
PREMIUMS
 articles of value such as toys, dishes,
silverware, and other goods given to
customers as a result of past sales or
sales promotion activities.
JOURNAL ENTRIES
1. When the premiums are purchased:
Premiums
Cash
xx
xx
2. When the premiums are distributed
to customers:
Premium expense
Premiums
xx
xx
xx
xx
xx
3. At the end of the year, if premiums
are still outstanding:
Premium expense
xx
Estimated premium liability
FINANCIAL
CLASSIFICATION
xx
STATEMENT
Current asset: Premiums
Current Liability: Estimated premium
liability
Distribution cost: Premium expense
FREE PRODUCT,
REBATE
DISCOUNT,
Accordingly,
the
entity
performance
obligations
customer options, namely:
has
two
in
these
1. To deliver or transfer the goods or
products sold.
2. To satisfy the customer options for
coupons for free products, discounts, and
rebates.
An entity is required to allocate the
transaction price of goods sold between
the products sold and the customer
options based on relative stand-alone
selling price.
The allocated transaction price of the
customer options shall be deferred and
recognized as income when options are
exercised or when the options expire.
If there is a cash remittance:
Cash
Premium expense
Premiums
If the options provide a material right to
the customer, the customer in effect
pays the seller in advance for future
delivery of additional goods.
AND
At contract inception, an entity shall
assess the goods promised in a contract
with a customer and shall identify as a
performance obligation each promise to
transfer to the customer either:
a) A distinct good
b) A series of distinct goods that are
substantially the same and that have
the same pattern of transfer to the
customer
COMPUTATION FOR STAND-ALONE
SELLING PRICE (FREE PRODUCT
COUPON EXAMPLE)
No. of free additional product
Multiply by actual selling price
Selling price of free products
Multiply by Expected redemption
Stand-alone selling price
JOURNAL
ENTRIES
PRODUCT COUPONS:
FOR
xx
xx
xx
xx
xx
FREE
To record the sales:
Cash
xx
Sales
Deferred revenue – coupons
xx
xx
To record the delivery of free products
Deferred revenue – coupons xx
Sales
xx
COMPUTATION FOR STAND-ALONE
SELLING PRICE (DISCOUNT COUPON
EXAMPLE):
Average price
Multiply by
no. of discount coupons
Total amount
Multiply by
percentage of discount
Total discount
on future purchases
Multiply by
expected redemption
Stand-alone selling price
xx
REBATE
To record the sales:
Rebate liability
Cash
xx
xx
xx
JOURNAL ENTRIES FOR DISCOUNT
COUPONS:
To record the sales:
xx
xx
To record the redemption of coupons
xx
REBATE COUPONS
 Refund that sellers provide to buyers
 Provided after the sell is made
 A liability that is reduced when the
manufacturer
reimburses
the
retailers.
 Stand-alone selling price of the rebate
coupon is equal to the discount on
the products sold during the year
adjusted by the expected redemption.
 Transaction price shall be allocated
between the products sold and the
rebate liability based on relative
stand-alone selling price.
Number of products sold
Multiply by discount per coupon
Total amount of discount
Expected redemption
Stand-alone selling
price of rebate coupon
FOR
xx
xx
xx
To record the delivery of free products
xx
Cash
xx
Deferred revenue – coupons xx
Sales
ENTRIES
Cash
Sales
Rebate liability
xx
xx
Cash
xx
Sales
Deferred revenue – coupons
JOURNAL
COUPON:
xx
xx
xx
xx
xx
xx
xx
GIFT CERTIFICATES
 Sold and customers can exchange for
future delivery of goods
 Nonrefundable and therefore the seller
should consider that some customers
might not redeem the certificates
 Non-redemption of the gift certificates
is referred to as "breakage". Breakage
means the unexercised contractual
rights of the customers under the gift
certificates.
 In the PH, gift certificates do not
expire, provided that they are not lost
 The seller shall recognize revenue from
breakage based on the value of
certificates redeemed in proportion
to the expected value of certificates to
be redeemed.
 Initially measured as unearned
income
Breakage revenue = proportion of value of
certificates redeemed to the expected
value of certificates to be redeemed x
expected value of breakage.
Expected value of breakage = total gift
certificates x percentage of expected
certificates that will not be redeemed
JOURNAL
ENTRIES
CERTIFICATES:
FOR
GIFT
To record the sales:
Cash
Sales
Deferred revenue
xx
xx
xx
To record
redeemed:
the
value
Deferred revenue
Sales
of
certificates
JOURNAL ENTRIES FOR CUSTOMER
LOYALTY PROGRAM:
xx
xx
To record the breakage revenue:
Deferred revenue
Breakage revenue
xx
xx
CUSTOMER LOYALTY PROGRAM
 designed to reward customers for past
purchases and to provide them with
incentives to make further purchases.
 the entity grants the customer award
credits often described as "points".
 The entity can redeem the "points" by
distributing to the customer free or
discounted goods or services.
MEASUREMENT
 An entity shall account for the award
credits as a separate component of the
initial sale transaction.
 the granting of award credits is
effectively accounted for as a future
delivery of goods or services.
 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.
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 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.
 the calculation of the revenue to be
recognized in any one period is made
on a "cumulative basis"
To record the sales:
Cash
xx
Sales
Unearned revenue – points
xx
xx
To record the redemption:
Unearned revenue – points
Sales
xx
xx
THIRD PARTY OPERATES LOYALTY
PROGRAM
 The revenue to be recognized is on a
net basis.
JOURNAL ENTRIES FOR THRD PARTY
OPERATING LOYALTY PROGRAM:
To record the sales:
Cash
Sales
Revenue from points
xx
xx
xx
To record payment to third party:
Loyalty program expense
Cash
xx
xx