DEPARTMENT OF ACCOUNTANCY

SCHOOL OF BUSINESS AND ACCOUNTANCY

HOLY ANGEL UNIVERSITY

Intermediate Accounting 1
PREMIUM & WARRANTY
LIABILITY
 Premiums

Articles of value given to customers as result of past

sales or sales promotion activities. Used to stimulate
sales
 Record Sales Record Purchase of
Premiums

Accounting Procedure

Record Liability for Record Redemption

Premiums
Cash Rebate Program

Recognize Cash Record

Rebate Program Payments of
Customer
Cash Discount Coupon

Recognize Cash Record Payments

Discount Coupon to Retailers
 Customer Loyalty Program

Entity grants customer award credits often described as

points. Accounted for separately from initial sale
transaction. The fair value of the consideration
received from initial sale shall be allocated between
the award credits and sale based on stand-alone price.
Customer Loyalty Program

Allocate the Record initial Record

transaction sale Redemption/s
price
Third Party Operated Loyalty Program
Record Initial Sale

Record Payment to Third Party

 Warranty

Sale under guarantee to provide free repair service or

replacement during a specified period if products
defective
Recognition
a. Present obligation (legal or constructive), as a result of past event

b. Probable outflow of resources

c. Can be measured reliably

 • Soundest theoretical support
Accrual • Matching principle
• Estimate is reviewed to determine
Approach reasonableness and accuracy
• Any difference – change in estimate

Accounting for
Warranty Expense as • Expensing warranty cost only when
actually incurred
Incurred • Warranty cost is immaterial
approach • Warranty period is short
 • Warranty is sold separately from the product

• Extended warranty – additional cost

• Recorded separately

Sale of • Deferred income

Warranty • Amortized – straight line over life of warranty or

revenue is recognized in proportion to the costs to be
incurred annually