SELF-PACED LEARNING MODULE

COLLEGE DEPARTMENT

MODULE 2
Subject:

INTERMEDIATE ACCOUNTING 2

AISAT COLLEGE – DASMARIÑAS, INC.

This material has been developed in support to the Senior High School Program implementation.
Materials included in this module are owned by the respective copyright holders. AISAT College –
Dasmariñas, the publisher and author do not represent nor claim ownership over them.
This material will be reproduced for educational purposes and can be modified for the purpose
of translation into another language provided that the source must be clearly acknowledged. Derivatives
of the work including creating an edited version, enhancement or a supplementary work are permitted
provided all original works are acknowledged and the copyright is attributed. No work may be derived
from this material for commercial purposes and profit.

INFORMATION SHEET PR-1.1.1

 Unit Accounting
Module PREMIUM LIABILITY
AE16-IA2 Intermediate Accounting 2 Units: 3 Page |2

“PREMIUM LIABILITY”

Illustration
An entity manufactures a certain product and sells it at P300 per unit.
A soup bowl is offered to customers on the return of 5 wrappers plus a remittance of P 10.
The bowl costs P50, and it is estimated that 60% of the wrappers will be redeemed.
The data for the first year concerning the premium plan are summarized below.
Sales, 10,000 units at P300 each 3,000,000
Soup bowls purchased, 2,000 units at P50 each 100,000
Wrappers redeemed 4,000

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 2nd
PRELIM
2 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module PREMIUM LIABILITY
AE16-IA2 Intermediate Accounting 2 Units: 3 Page |3

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 2nd
PRELIM
2 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module PREMIUM LIABILITY
AE16-IA2 Intermediate Accounting 2 Units: 3 Page |4

Cash rebate program

A variation of a premium offer is a cash rebate program which has become common place.
Cash register receipts, bar codes, rebate coupons and other proof of purchase often can be mailed to
the manufacturer for cash rebate.

Like any premium offer, the purpose of the cash rebate program is to stimulate sales.
Accordingly, the estimated amount of the cash rebate should be recognized both as an expense and an
estimated liability in the period of sale.

Illustration
An entity offered P500 cash rebate on a particular model of TV 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.

During the current year, the entity sold 4,000 TV sets and total payments to customers amounted to
P450,000.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 2nd
PRELIM
2 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module PREMIUM LIABILITY
AE16-IA2 Intermediate Accounting 2 Units: 3 Page |5

Cash discount coupon

Another variation of the premium offer is the cash discount coupon program.
The cash discount coupon program is a popular marketing tool for the purpose of stimulating sales.
Like a premium offer and cash rebate program, an expense and an estimated liability for the expected
cash discount should be recognized in the period of sale.

Illustration
During the current year, an entity inserted in each package sold a coupon offering P300 off the purchase
price of a particular brand of product when the coupon is presented to retailers.
The retailers are reimbursed for the face amount of coupons plus 10% for handling. Previous experience
indicates that 30% of coupons will be redeemed.

During the current year, the entity issued coupons with face amount of P5,000,000 and total payments
to retailers amounted to P1,100,000.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 2nd
PRELIM
2 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module PREMIUM LIABILITY
AE16-IA2 Intermediate Accounting 2 Units: 3 Page |6

Customer loyalty program — IFRS 15

Many entities use a customer loyalty program to build brand loyalty, retain their valuable customers and
of course, increase sales volume.

The customer loyalty program is generally designed to reward customers for past purchases and to
provide them with incentives to make further purchases.

If a customer buys goods or services, the entity grants the customer award credits often described as
"points"

The entity can redeem the "points" by distributing to the customer free or discounted goods or services.

A customer loyalty program operates in a variety of ways.

Customers may be required to accumulate a specified minimum number of award credits or “points"
before they can be redeemed.

Measurement
An entity shall account for the award credits as a separately component of the initial sale transaction.
In other words, the granting of award credits is effectively accounted for as a future delivery of goods or
services.

IFRS 15, paragraph 74, provides that an entity shall allocate the transaction price to each performance
obligation identified in a contract on a relative stand-alone selling price basis.

In other words, 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.

The stand-alone selling price is the price at which an entity would sell a promised good or service
separately to a customer.

Recognition
The consideration allocated to the award credits is initially recognized as deferred revenue and
subsequently recognized as revenue when the award credits are 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.

The estimated redemption rate is assessed each period. changes in the total number expected to be
redeemed do not affect the total consideration for the award credits.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 2nd
PRELIM
2 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module PREMIUM LIABILITY
AE16-IA2 Intermediate Accounting 2 Units: 3 Page |7

Instead, the 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.

In other words, the calculation of the revenue to be recognized in any one period is made on a
"cumulative basis in order to reflect the changes in estimate.

Illustration — IFRS 15
An entity, a grocery retailer, operates a customer loyalty program.

The entity 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 2020 amounted to base on stand-alone selling price.

During 2020, the customers earned 10,000 points.

But management expects that 80% or 8,000 of these points will be redeemed.

The stand-alone selling price of each loyalty point is estimated at P 100.

On December 31, 2020, 4,000 points have been redeemed in exchange for groceries.

In 2021, the management revised expectations and now expects that 90% or 9,000 points will be
redeemed altogether.

During 2021, the entity redeemed 4,100 points. In 2022, a further 900 points are redeemed.

Management continues to expect that only 9,000 points will ever be redeemed, meaning, no more
points will be redeemed after 2022.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 2nd
PRELIM
2 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module PREMIUM LIABILITY
AE16-IA2 Intermediate Accounting 2 Units: 3 Page |8

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 2nd
PRELIM
2 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module PREMIUM LIABILITY
AE16-IA2 Intermediate Accounting 2 Units: 3 Page |9

Third party operates loyalty program

An entity, a retailer of electrical goods, participates in a customer loyalty program operated by an
airline.

The entity grants program members one air travel point for every P1,000 spent on electrical goods.

Program members can redeem the points for travel with the airline subject to availability. The entity
pays the airline P60 for each point.

During the current year, the entity sold electrical goods for consideration totaling P 4,500,000 based on
stand-alone selling price and granted 5,000 points with stand-alone selling price of
P100 per point

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 2nd
PRELIM
2 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module PREMIUM LIABILITY
AE16-IA2 Intermediate Accounting 2 Units: 3 P a g e | 10

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 2nd
PRELIM
2 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module PREMIUM LIABILITY
AE16-IA2 Intermediate Accounting 2 Units: 3 P a g e | 11

The entity has fulfilled its obligation by granting the points.

Therefore, revenue from points is recognized when the electrical goods are sold.

Reference:
Intermediate Accounting Vol. 2
2020 Edition
Conrado T. Valix, Jose F. Peralta, Christian Aris M. Valix

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 2nd
PRELIM
2 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module PREMIUM LIABILITY
AE16-IA2 Intermediate Accounting 2 Units: 3 P a g e | 12

STUDENT NAME: _____________________________________ SECTION: ___________

WRITTEN WORK PR-2.1.1

Written Work Title: Premium Liability
Written Task Objective: ▪ After completing this written work, you will be able to prepare journal
entries to record premium liabilities.

Instructions:

Requirement:
1. Typed-written or handwritten. Tasks must be neat and presentable.
2. Show your computations.

Deadline of Submission: April 12, 2022

Assessment Method : Written Work Criteria Checklist

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 2nd
PRELIM
2 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module PREMIUM LIABILITY
AE16-IA2 Intermediate Accounting 2 Units: 3 P a g e | 13

STUDENT NAME: _____________________________________ SECTION: ___________

WRITTEN OUTPUT CRITERIA CHECKLIST PR-2-1.1

Did I … CRITERIA SCORING
1 2 3 4 5
1. Logic and key points. All ideas are logically presented.
2. Content. Content of the essay flows and is passionate.
3. Cleanliness. Very clean and well presented.
4. Spelling and Grammar. No error in spelling and grammar.
5. Word usage. Word choice and usage are professionals.

GRADES

Teacher’s Remarks □ Quiz □ Recitation □ Project

5 - Excellently Written
4 - Very Satisfactory Written
3 - Satisfactory Written
2 - Fairly Written
1 - Poorly Written

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 2nd
PRELIM
2 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director