Premium

Liability
SARAH FE SHARON L. GABRIEL, MBA, CPA, CMITAP, LPT
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.
1. When the premiums are purchased
Premiums xx
Cash xx

2. When the premiums are distributed to customers:

Premiums Expense xx
Premiums xx

3. Outstanding premiums at the end of the year:

Premiums Expense xx
Estimated premium liability xx
1. When the premiums are purchased
Premiums xx
Cash xx
Current Assets
2. When the premiums are distributed to customers:
Premiums Expense xx
Premiums xx

3. Outstanding premiums at the end of the year:

Premiums Expense xx
Current Liabilities
Estimated premium liability xx
FREE PRODUCT, DISCOUNT, AND REBATE

IFRS 15, paragraph 22, provides that at contract inception, an entity

shall assess the goods promised in a contract with 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.

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.
The entity has two performance
obligations :
1. To deliver or transfer the goods or products sold
2. To satisfy the customer options for coupons for free product,
discount, and rebate.
FREE PRODUCT, DISCOUNT, AND REBATE

Under IFRS 15, paragraph 74, 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 option

shall be deferred and recognized as income when options
are exercised or when the options expire.
Illustration – Free products
ABC sells notebooks for P50 each. There is a
promotion wherein if a customer buys 6 pieces in a
single transaction, a customer receives a coupon for
one additional notebook for free. During 2020, the
entity sold 126,000 pieces of notebooks.

It is expected that 2/3 of the total coupons will be

redeemed. During 2021, the entity delivered 10,500
free additional notebooks to the customers.
Illustration
ABC sells notebooks for P50 each. There is a promotion wherein if a customer buys 6 pieces in a single transaction, a customer receives
a coupon for one additional notebook for free. During 2020, the entity sold 126,000 pieces of notebooks.

It is expected that 2/3 of the total coupons will be redeemed. During 2021, the entity delivered 10,500 free additional notebooks to the
customers.

Stand-alone selling price of coupons:

No. of free additional notebooks (126,000 units / 6) 21,000
x actual selling price P 50
Selling price of free products P1,050,000
Expected rate of redemption 2/3
P 700,000

Allocation of selling price (126,000 units x P50 = P6,300,000):

Stand-alone Fraction Allocated
Products sold 6,300,000 6.3M / 7M 5,670,000
Coupons 700,000 0.7M / 7M 630,000
7,000,000 6,300,000
To record sales for 2020:
Cash 6,300,000
Sales 5,670,000
Deferred revenue – coupons 630,000

To record the delivery of 10,500 free notebooks in 2021:

Deferred Revenue – coupons 315,000*
Sales 315,000
*((10,500 / 21,000) x 630,000) = 315,000

The balance of Deferred Revenue on 12/31/2021:

01/01/2021 beginning balance 630,000
Less: Delivered free notebooks – 2021 315,000
Ending balance 315,000
Illustration – Discount Coupons
ABC is a retailer that sells consumer products. On its 48 th
year of operations, the entity has launched a promotional
campaign wherein customers who buy with a single
purchase of at least P12,000 shall be granted “48% discount
coupons” on future purchases. The coupons may be used
for the year 2021. During the campaign, the entity sold
products worth P8,100,000 and issued 250 “48% discount
coupons” to the customers. It is expected that 75% of the
coupons will be redeemed and the customers using the
discount coupons will spend an average price of P10,000.
 Illustration – Discount Coupons
ABC is a retailer that sells consumer products. On its 48 th year of operations, the entity has launched a promotional campaign
wherein customers who buy with a single purchase of at least P12,000 shall be granted “48% discount coupons” on future
purchases. The coupons may be used for the year 2021. During the campaign, the entity sold products worth P8,100,000 and
issued 250 “48% discount coupons” to the customers. It is expected that 75% of the coupons will be redeemed and the customers
using the discount coupons will spend an average price of P10,000.

Average price of future purchases P10,000

X number of discount coupons 250
Total amount of future purchases 2,500,000
X percent of discount 48%
Total discount on future purchases 1,200,000
X expected redemption 75%
Stand-alone selling price of coupons 900,000
Stand-alone Fraction Allocated
Products sold 8,100,000 8.1M / 9M 7,290,000
Coupons 900,000 0.9M / 9M 810,000
9,000,000 8,100,000
Illustration – Discount Coupons
ABC is a retailer that sells consumer products. On its 48 th year of operations, the entity has launched a promotional campaign
wherein customers who buy with a single purchase of at least P12,000 shall be granted “48% discount coupons” on future
purchases. The coupons may be used for the year 2021. During the campaign, the entity sold products worth P8,100,000 and issued
250 “48% discount coupons” to the customers. It is expected that 75% of the coupons will be redeemed and the customers using
the discount coupons will spend an average price of P10,000.
To record sales:
Cash 8,100,000
Sales 7,290,000
Deferred revenue - coupons 810,000

To record the redemption of coupons:

Cash 975,000
Deferred revenue 810,000
Sales 1,785,000

*Total amount of future purchases 2,500,000

Less: Discount (48% x 2,500,000) 1,200,000
Net Price 1,300,000
X expected redemption 75%
Cash received from customers 975,000
Illustration – Rebate Coupons
ABC is a manufacturer and sells its products to retailers. Retailers sell the
product to its customers and for each product purchased by the
customers, a coupon of P50 discount is given and may be used on future
purchase of the same product. Retailers are reimbursed for the discount
by the manufacturer. During the current year, the manufacturer sold
40,000 units to the retailers at P160 each product. It is expected that 80% of
the coupons will be redeemed. At year-end, the manufacturer paid the
retailer P600,000 as reimbursement.
Illustration – Rebate Coupons
ABC is a manufacturer and sells its products to retailers. Retailers sell the product to its customers and for each product purchased by the
customers, a coupon of P50 discount is given and may be used on future purchase of the same product. Retailers are reimbursed for the
discount by the manufacturer. During the current year, the manufacturer sold 40,000 units to the retailers at P160 each product. It is expected
that 80% of the coupons will be redeemed. At year-end, the manufacturer paid the retailer P600,000 as reimbursement.

Number of products sold 40,000

X discount per coupon P50
Total amount of discount 2,000,000
X Expected redemption 80%
Stand-alone selling price of rebate coupons 1,600,000
Stand-Alone Fraction Allocated
Products sold (40,000 x P160) 6,400,000 6.4M / 8M 5,120,000
Rebate coupons 1,600,000 1.6M / 8M 1,280,000
8,000,000 6,400,000
Illustration – Rebate Coupons
ABC is a manufacturer and sells its products to retailers. Retailers sell the product to its customers and for each product purchased by the
customers, a coupon of P50 discount is given and may be used on future purchase of the same product. Retailers are reimbursed for the
discount by the manufacturer. During the current year, the manufacturer sold 40,000 units to the retailers at P160 each product. It is expected
that 80% of the coupons will be redeemed. At year-end, the manufacturer paid the retailer P600,000 as reimbursement.

To record sales to retailers:

Cash 6,400,000
Sales 5,120,000
Rebate Liability 1,280,000

To record the reimbursement to retailers:

Rebate Liability 600,000
Cash 600,000
Gift Certificates

Under IFRS 15, the non-redemption of gift

certificates is referred to as “breakage”.

The seller shall recognize revenue from breakage

based on the value of the certificates redeemed in
proportion to the expected value of the certificates
to be redeemed.
Illustration – Gift certificates
During the current year, an entity sold gift
certificates worth P4,000,000 to customers in
exchange for future delivery of its products. The
gift certificates are nonrefundable and the entity
expects that 10% of the certificates will not be
redeemed. The entity redeemed gift certificates
worth P1,440,000 during the current year.
Illustration – Gift certificates
During the current year, an entity sold gift certificates worth P4,000,000 to customers in exchange for future delivery of its products. The gift
certificates are nonrefundable and the entity expects that 10% of the certificates will not be redeemed. The entity redeemed gift certificates
worth P1,440,000 during the current year.

Expected value of breakage (4,000,000 x 10%) 400,000

Expected value of cert. to be redeemed (4M x 90%) 3,600,000
Value of certificates redeemed 1,440,000
Breakage revenue = ((1,440,000 / 3,600,000) x 400,000) = 160,000

To record the sale of gift certificates:

Cash 4,000,000
Deferred revenue – gift certificates 4,000,000
To record the value of certificates redeemed:
Deferred revenue – gift certificates 1,440,000
Sales 1,440,000
To record the breakage revenue:
Deferred revenue – gift certificates 160,000
Breakage revenue 160,000
Customer loyalty program

IFRS 15, paragraph 74, provides an entity shall

allocate the transaction price to each performance
obligation identified in a contract on a relative stand-
alone selling price.

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.
Illustration - Customer loyalty program
Super Lucky operates a customer loyalty program. It grants program
members loyalty points when they spend a specified amount on groceries.
Program members can redeem the points for further groceries. The points
have no expiry date. The sales during 2021 amounted to P10,800,000 based
on stand-alone selling price. During 2021, the customers earned 12,000
points. However the management expects that 90% or 10,800 of these points
will be redeemed. The stand-alone selling price of each loyalty point is
estimated at P100. On December 31, 2021, 6,480 points were redeemed in
exchange for groceries. In 2022, the management revised expectations and
now expects 95% or 11,400 will be redeemed altogether. During 2022, the
entity redeemed an additional 3,780 points. In 2023, a further 1,140 points are
redeemed. Management continues to expect that only 11,400 points will ever
be redeemed, meaning, no more points will be redeemed after 2023.
Stand-alone selling price of points ( 12,000 x P100 = 1,200,000)

Stand-Alone Fraction Allocated

Product sales 10,800,000 10.8M / 12M 9,720,000
Points 1,200,000 1.2M / 12M 1,080,000
12,000,000 10,800,000

To record the initial sale in 2021:

Cash 10,800,000
Sales 9,720,000
Unearned Revenue – points 1,080,000

Redemption of 6,480 points in 2021:

Unearned revenue – points ((6,480 / 10,800) x 1,080,000) 648,000
Sales 648,000
Redemption of 1,140 points in 2023:

Points redeemed in 2021 6,480

Points redeemed in 2022 3,780
Points redeemed in 2023 1,140
Total points redeemed as of 12/31/2023 11,400

Cumulative revenue – 12/31/2023:

(11,400 / 11,400) x P 1,080,000 1,080,000
Less: cumulative revenue – 12/31/2022 972,000
Revenue to be recognized in 2023 108,000

Unearned revenue – points 108,000

Sales 108,000
Redemption of 3,780 points in 2022:

Points redeemed in 2021 6,480

Points redeemed in 2022 3,780
Total points redeemed as of 12/31/2022 10,260

Cumulative revenue – 12/31/2022:

(10,260 / 11,400*) x P 1,080,000 972,000
Less: revenue recognized in 2021 648,000
Revenue to be recognized in 2022 324,000

Unearned revenue – points 324,000

Sales 324,000

*change in management’s estimation, from 90% or 10,800 points to 95% or 11,400 points.
PROBLEM 1
PROBLEM 2
PROBLEM 3
PROBLEM 4