Exercise: Premiums

Monday, September 19, 2022 9:01 PM

Link: Premiums and Warranties

Illustrative 1: During the current year, Pepper Company sold P500,000 boxes of cake mix under
program. Each box contained one coupon, which entitled the customer to a baking pan upon re

The entity paid P50 per pan and P5 for handling and shipping and estimated that 80% of the co
redeemed, even though only 300,000 coupons had been processed during the year.

Required:
1. What is the premium expense for the current
2. What amount should be reported as liability for unredeemed coupons at year-end?
See notebook for solutions.

Illustrative 2: Pepper Company sells computers for P20,000 each and also gives each customer
requires the company to perform periodic services and to replace defective parts.

During 2025, the company sold 500 computers. Based on experience, the company has estimat
warranty costs as P120 for parts and P150 for labor.

In 2025, Pepper Company incurred actual warranty costs relative to 2025 computer sales of P5,
P12,600 for labor.

Required:
1. The amount reported as warranty expenses in 2025 is?
2. The amount reported under estimated warranty liability is?
See notebook for solutions.

Illustrative 3: During 2024, Rain Company introduced a new product carrying a two-year warra
estimated warranty costs related to peso sales are 3% within 12 months following sale and 5%
following sale. Sales and warranty expenditures for the years ended December 31, 2024 and 20

Sales Actual Expenditures

2024 5,000,000 100,000
2025 8,000,000 600,000
See notebook for solutions.

Illustrative 3: During 2024, Rain Company introduced a new product carrying a two-
year warranty against defects. The estimated warranty costs related to peso sales are
3% within 12 months following sale and 5% in the second 12 months following sale.
Sales and warranty expenditures for the years ended December 31, 2024 and 2025 ,
are as follows:

Sales Actual Expenditures

2024 5,000,000 100,000
2025 8,000,000 600,000

Required:
1. Rain Company's estimated warranty liability at December 31, 2024 is?
2. Rain Company's warranty expense for the year 2024 is?
3. Rain Company's estimated warranty liability at December 31, 2025 is?
4. Rain Company's warranty expense for the year 2025 is?

Illustrative 4: Pokemon Music Emporium carries a wide variety of music promotion

techniques (warranties and premiums) to attract customers.

Musical instrument and sound equipment are sold in a one-year warranty for
replacement of parts and labor. The estimated warranty cost, based on past
experience, is 2% of sales.

The premium is offered on the recorded and sheet music. Customers receive a coupon
for each peso spent on recorded music or sheet music. Customers may exchange 200
coupons and P20 for an MP4 player. Pokemon pays P34 for each player and estimates
that 60% of the coupons give to customers will be redeemed.

Pokemon total sales for 2026 were P115,200,000 (P86,400,000 from musical
instrument and sound reproduction equipment and P28,800,000 from recorded music
and sheet music).

Replacement parts and labor for warranty work totaled P2,624,000 during 2026. a
total of 104,000 MP4 players used in the premium program were purchased during
the year and there were 19200,000 coupons redeemed in 2026.

The accrual method is used by Pokemon to account for the warranty and premium
costs for financial reporting purposes. The balance in the accounts related to
warranties and premiums on January 1, 2026 were as shown below:
Inventory of Premium MP4 players - P639,200
Provision for Premium Claims Outstanding - 716,800
The accrual method is used by Pokemon to account for the warranty and premium
costs for financial reporting purposes. The balance in the accounts related to
warranties and premiums on January 1, 2026 were as shown below:
Inventory of Premium MP4 players - P639,200
Provision for Premium Claims Outstanding - 716,800
Provision for warranties - 2,176,800

Required:
1. Warranty expense
2. Provision for warranties
3. Premium expense
4. Inventory for MP4 players
5. Provision for premium claims outsaanding