INTERMEDIATE ACCOUNTING 2 MODULE

Chapter 2: An entity offered P500 cash rebate on a particular model of TV

PREMIUM LIABILITY 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.
Objectives:
The learner should be able:
During the current year, the entity sold 4,000 TV sets and total
 To know the recognition of a premium liability.
payments to customers amounted to P450,000.
 To know the recognition of a cash rebate program.
 To know the recognition of a cash discount offer program
Computation:
 To understand the recognition and measurement of a
Rebate coupons issued 4,000
customer loyalty program.
Expected to be redeemed 40%
Coupon rebates to be redeemed 1,600
Cash rebate per coupon 500
Start of Discussion Estimated rebate liability 800,000

 PREMIUMS
Rebate Expense 800,000
- Are articles of value such as toys, dishes, silverware and
Estimated Rebate Liability 800,000
other goods given to customers as result of past sales or
sales’ promotion activities.
Estimated Rebate Liability 450,000
Cash 450,000
The accounting procedures for the acquisition of premiums and
recognition of the premium liability are as follows:
 CASH DISCOUNT COUPON
1. When the premiums are purchased:
It is a popular marketing tool for the purpose of stimulating
Premiums xxx
sales.
Cash xxx
2. When premiums are distributed to customers:
Illustration:
Premium expense xxx
During the current year, an entity inserted in each package sold
Premiums xxx
a coupon offering P300 off of purchase price of a particular
3. For the outstanding premiums at the end of the year:
brand of product when the coupon is presented to retailers.
Premium expense xxx
Estimated premium liability xxx
The retailers are reimbursed for the face amount of coupons plus
10% for handling. Previous experience indicates that 30% of
coupons will be redeemed.
Illustration:
An entity manufactures a certain product and sells it at P300 per
During the current year, the entity issued coupons with face
unit. A soup bowl is offered to customers on the return of 5
amount of P5,000,000 and total payments to retailers amounted
wrappers plus a remittance of P10.
to P1,100,000.
The bowl costs P50, and it is estimated that 60% of the
Computation:
wrappers will be redeemed. The data for the first year
Face Amount of coupons to be redeemed
concerning the premium plan are summarized below:
(5,000,000 x 30%) 1,500,000
Multiply by 110%
Sales, 10,000 units at P300 each 3,000,000
Total coupon Liability 1,650,000
Soup bowl’s purchased, 2,000 units at P50 each 100,000
Wrappers redeemed 4,000
Cash discount coupon expense 1,650,000
Estimated coupon liability 1,650,000
Computation:
Wrappers to be redeemed 6,000
Estimated Coupon liability 1,100,000
Less: Wrappers redeemed 4,000
Cash 1,100,000
Balance 2,000

Premiums to be distributed 400

 CUSTOMER LOYALTY PROGRAM (IFRS 15)
Estimated liability 16,000
- It is generally designed to reward customers for past
purchases and to provide them with incentives to make
further purchases.
 CASH REBATE PROGRAM
- If a customer buy goods or services, the entity grants the
The estimated amount of the cash rebate should be recognized
customer award credits often described as “points”.
both as an expense and an estimated liability in the period of
sale.
Measurement
- Award credits should be accounted as a separate component
Illustration:
of the initial sale transaction.
INTERMEDIATE ACCOUNTING 2 MODULE
- The fair value of the consideration received with respect to Redemption of 900 points in 2021
the initial sale shall be allocated between the award credits Unearned revenue – points 90,000
and the sale based on relative stand-alone selling price. Sales 90,000

Recognition  Third Party operates Loyalty Program

The consideration allocated to the award credits is initially An entity participates in a customer loyalty program operated by
recognized as deferred revenue and subsequently recognized as an airline. The entity grants program members one air travel
revenue when the award credits are redeemed. point for every P1,000 spent on electrical goods.

Illustration: Program members can redeem the points for travel with the
An entity, a grocery retailer, operates a customer loyalty program. airline subject to availability. The entity pays the airline P60 per
The entity grants program members loyalty points when they spend each point.
a specified amount on groceries. Program members can redeem the
points for further groceries. The points have no expiry date. During the current year, the entity sold electrical goods for
consideration totaling P4,500,000 based on stand-alone selling
The sales during 2020 amounted to P9,000,000 based on stand- price and granted 5,000 points with stand-alone selling price of
alone selling price. during 2020, the customers earned 10,000 P100 per point.
points. But management expects that 80% or 8,000 of these points
will be redeemed. The stand-alone selling price of each loyalty point Computation:
is estimated at P100. Selling Price Fraction Allocated
Product sales 4,500,000 45/50 4,050,000
On December 31, 2020, 4,000 points have been redeemed in Points 500,000 5/50 450,000
exchange for groceries. In 2021, the management revised 5,000,000 4,500,000
expectations and now expects that 90% or 9,000 points will be
redeemed altogether.
Revenue from points 450,000
During 2021, the entity redeemed 4,100 points. In 2022, a further Payment to airline (300,000)
900 points are redeemed. Management continues to expect that Net revenue from points 150,000
only 9,000 points will ever be redeemed, meaning, no more points
will be redeemed after 2022.  To record the initial sale:
Cash 4,500,000
Allocation of Transaction Price: Sales 4,050,000
Product Sales 9,000,000 Revenue from points 450,000
Points (10,000 x P100) 1,000,000
Total 10,000,000  To record payment to airline:
Loyalty program expense 300,000
Product Sales (9/10 x 9,000,000) 8,100,000 Cash 300,000
Points (1/10 x 9,000,000) 900,000
Total transaction price 9,000,000

Journal Entries: -End of Discussion-

The initial sale in 2020 is recorded as follows:
Cash 9,000,000
Sales 8,100,000
Unearned revenue – points 900,000

Redemption of 4,000 points in 2020

Unearned revenue – points 450,000
Sales 450,000

Redemption of 4,100 points in 2021

Unearned revenue – points 360,000
Sales 360,000

Points redeemed in 2020 4,000

Points redeemed in 2021 4,100
Total points redeemed to December 31,2021 8,100

Cumulative revenue on December 31, 2021

(8,100/9,000 x 900,000) 810,000
Revenue recognized in 2020 450,000
Revenue to be recognized in 2021 360,000
INTERMEDIATE ACCOUNTING 2 MODULE