Premiums - articles of value given to customers as result of past sales or sales promotion

activities.

Journal Entries
Premiums XX
Cash XX
To record purchase of premiums

Premium expense XX
Premiums XX
To record the distribution of premiums to customers

Premium expense XX
Estimated premium liability XX
To record premiums outstanding at year-end

SAMPLE PROBLEM
So as to increase the sales of the company, Mariano Co. inaugurated a sales
promotional campaign on July 1, 2020. The entity placed a coupon redeemable for a premium in
each package of canned goods sold. The cost of each premium is P25 and five coupons must
be presented by a customer in order to receive a premium. Only 55% of the coupons issued
was estimated by the company to be redeemed. For the six months ended December 31, 2020,
the following information is available:
Packages of canned goods sold 180,000
Coupons redeemed 30,000
Premiums purchased 200,000
Requirement: Prepare the journal entries related to the premium purchases and redemption,
and year-end adjustment.

SUGGESTED SOLUTION
Premiums 200,000
Cash 200,000
To record purchase of premiums

Premium expense (6,000* x P25) 150,000

Premiums 150,000
To record the distribution of premiums to customers
* (30,000 coupons redeemed / 5 coupons to be presented)

Premium expense (13,800* x P25) 345,000

Estimated premium liability 345,000
To record premiums outstanding at year-end
* Coupons to be redeemed (180,000 x 55%) 99,000
Less: Coupons redeemed 30,000
Balance 69,000
Premiums to be distributed (69,000 / 5) 13,800
Customer loyalty program - designed to reward customers for past purchases and to provide
them with incentives to make further purchases.

Award credits - granted to customers who bought goods or availed services of a business;
often termed as points.

Stand-alone selling price - price at which an entity would sell a promised good or service
separately to a customer.

Measurement basis of award credits (IFRS 15)

➔ The entity shall account for the award credits as a separate component of the initial sale
transaction. It is 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
prices.

Recognition of award credits

➔ Initial recognition: deferred revenue
➔ Subsequent recognition: revenue (when 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.
◆ 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.
Thus, the calculation of the revenue to be recognized in any one period is made
on a cumulative basis so as to reflect the changes in estimate.

SAMPLE PROBLEM
Sinandomeng Corp. operates a customer loyalty program where program members are
granted loyalty points when they spend a specified amount on groceries. The points gained by
the program members have no expiry date and they may be redeemed for further groceries.
The sales of the company, based on stand-alone selling price, were P4,500,000 during 2020. In
the same year, a total of 5,000 points were earned by the customers. The stand-alone selling
price of each loyalty point is estimated at P100. However, the company only expects that 75%
of these points will be redeemed. On December, 31, 2020, 1,500 points were redeemed in
exchange for groceries. In 2021, the company has revised its expectations and has noted that
80% of the points will be redeemed altogether. During 2021 and 2022, the entity redeemed
1,600 and 900 points, respectively. The company expects that the remaining points will not
anymore be redeemed in 2022.
Requirement: Prepare the necessary journal entries related to the customer loyalty program.

SUGGESTED SOLUTION
Cash 5,000,000
Sales* 4,050,000
Unearned revenue - points** 450,000
To record initial sale in 2020
 Product sales 4,500,000
Points - stand-alone selling price (5,000 x 100) 500,000
Total 5,000,000

* Product sales (4,500,000 / 5,000,000 x 4,500,000) 4,050,000

** Points (500,000 / 5,000,000 x 4,500,000) 450,000
Total transaction price
4,500,000

Unearned revenue - points* 180,000

Sales 180,000
To record redemption of 1,500 points in 2020
* (1,500 / 3,750 x 450,000)

Unearned revenue - points* 168,750

Sales 168,750
To record redemption of 1,600 points in 2021
* Points redeemed in 2020 1,500
Points redeemed in 2021 1,600
Total points redeemed to 12/31/21 3,100

Cumulative revenue on 12/31/21 (3,100 / 4,000 x 450,000) 348,750

Revenue recognized in 2020 (180,000)
Revenue to be recognized in 2021 168,750

Unearned revenue - points* 101,250

Sales 101,250
To record redemption of 900 points in 2022
* Points redeemed in 2020 1,500
Points redeemed in 2021 1,600
Points redeemed in 2022 900
Total points redeemed to 12/31/22 4,000

Cumulative revenue on 12/31/22 (4,000 / 4,000 x 450,000) 450,000

Cumulative revenue in 2021 (348,750)
Revenue to be recognized in 2022 101,250

Warranty -

Recognition of warranty provision (PAS 37)

➔ The entity has a present obligation, legal or constructive, as a result of a past event.
◆ A past event is an obligating event, such as the sale of the product which gives
rise to a constructive obligation.
 ➔ It is probable that an outflow of resources embodying economic benefits would be
required to settle the obligation.
➔ The amount of the obligation can be measured reliably.
◆ The amount recognized as the warranty provision should be the best estimate of
the expenditure to settle the present obligation.
◆ Where no reliable estimate can be made, no warranty liability is recognized.

Non-financial liabilities, Provisions and Contingencies

● Warranties and product guarantees
● Unearned revenues arising from contracts, gift certificates, and subscriptions
● Other provisions and contingencies