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Ch2Premium Liability

Here are the key steps to solve this problem: 1. Determine the total points to be redeemed - 500,000 x 80% = 400,000 2. Determine points redeemed so far - 300,000 3. Calculate outstanding points - 400,000 - 300,000 = 100,000 4. Calculate the estimated liability - Outstanding points are 100,000 - Redemption cost per point is $1.50 - So estimated liability is 100,000 x $1.50 = $150,000 Therefore, the estimated liability for outstanding points as of December 31, 2017 is $150,000.

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Crysta Lee
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1K views20 pages

Ch2Premium Liability

Here are the key steps to solve this problem: 1. Determine the total points to be redeemed - 500,000 x 80% = 400,000 2. Determine points redeemed so far - 300,000 3. Calculate outstanding points - 400,000 - 300,000 = 100,000 4. Calculate the estimated liability - Outstanding points are 100,000 - Redemption cost per point is $1.50 - So estimated liability is 100,000 x $1.50 = $150,000 Therefore, the estimated liability for outstanding points as of December 31, 2017 is $150,000.

Uploaded by

Crysta Lee
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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PREMIUM LIABILITY

Chapter 2
PREMIUMS
 Articles of value such as toys, dishes, silverware and
other goods and in some cases cash payments, given to
customers as a result of past sales promotion activities.
 When a merchandise is sold, an accounting liability for
the future distribution of the premium arises and should
be given accounting recognition.
MEASUREMENT AND RECOGNITION
 The fair value of the consideration received with respect
to the initial sale shall be allocated between the award
credits and the sale on relative stand – alone selling
price.
 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

Stand – alone selling price is the price at which an entity would sell a
promised good or service separately to a customer
PROBLEM 2 – 1
2018
Estimated Premium Liability 120,000.00
Prmium Expense 120,000.00

Cash 4,200,000.00
Sales 4,200,000.00

Premium 580,000.00
Cash 580,000.00

Cash 90,000.00
Premium Expense 360,000.00
Premium 450,000.00

Premium Expense 180,000.00


Cash 180,000.00

Premium Expense 180,000.00


Estimated Premium Liability 180,000.00
PROBLEM 2 – 1
2017
Cash 3,600,000.00
Sales 3,600,000.00

Premium 390,000.00
Cash 390,000.00

Cash 50,000.00
Premium Expense 200,000.00
Premium 250,000.00

Premium Expense 100,000.00


Cash 100,000.00

Premium Expense(P20+P40 x 2,000u) 120,000.00


Estimated Premium Liability 120,000.00
PROBLEM 2 – 2
2017
Cash 2,500,000.00
Sales 2,500,000.00

Premium - towel 175,000.00


Cash 175,999.00

Cash 20,000.00
Premium Expense 80,000.00
Premium - towel 100,000.00

Premium Expense 5,000.00


Cash 5,000.00

Premium Expene (P85x600u) 51,000.00


Estimated Premium Liability 51,000.00
PROBLEM 2 – 2
2018
Estimated Premium Liability 51,000.00
Prmium Expense 51,000.00

Cash 3,125,000.00
Sales 3,125,000.00

Premium - towel 200,000.00


Cash 200,000.00

Cash 36,000.00
Premium Expense 144,000.00
Premium 180,000.00

Premium Expense 9,000.00


Cash 9,000.00

Premium Expense 68,000.00


Estimated Premium Liability 68,000.00
PROBLEM 2 – 2

2017 2018
Current Asset
Premium – towel P75,000 P95,000
Current Liability
Estimated Premium Liability P51,000 P68,000
Selling Expense
Premium Expense P136,000 P170,000
PROBLEM 2 – 3
Cash 3,600,000.00
Sales 3,600,000.00

Premium 900,000.00
Cash 900,000.00

Premium Expense 30,000.00


Cash 30,000.00

Cash 40,000.00
Premium Expense 680,000.00
Premium 720,000.00

Premium Expense 150,000.00


Cash (P5,000x30) 150,000.00

Premium Expense (P85x2,000u) 170,000.00


Estimated Premium Liability 170,000.00
PROBLEM 2 – 4 (2017)

Cash 7,000,000.00
Sales (7/8 x P7M) 6,125,000.00
Unearned Revenue - Points (1/8 x P7M) 875,000.00

Unearned Revenue - Points 328,125.00


Sales 328,125.00

Points to be Redeemed (80% x 50,000) 40,000

Revenue to be recognized (15,000/40,000 x P875,000)


PROBLEM 2 – 4 (2018)

Unearned Revenue - Points 144,375.00


Sales 144,375.00

Points to be Redeemed
(85% x 50,000) 42,500

Total Points Redeemed to 12/31/2018 (15,000+7950) 22,950

Cumulative revenue - 12/31/2018 (P22,950/P42,500 x P875,000) 472,500.00


Revenue Recognized in 2017 328,125.00
Revenue Recognized in 2018 144,375.00
PROBLEM 2 – 4 (2019)

Unearned Revenue - Points 52,500.00


Sales 52,500.00

Points to be Redeemed
(85% x 50,000) 42,500

Total Points Redeemed to 12/31/2018 (15,000+7,950+2,550) 25,500

Cumulative revenue - 12/31/2018 (P25,500/P42,500 x P875,000) 525,000.00


Revenue Recognized in 2017-2018 472,500.00
Revenue Recognized in 2019 52,500.00
PROBLEM 2 – 4 (2019)

Unearned Revenue - Points 262,500.00


Sales 262,500.00

Points to be Redeemed
(90% x 50,000) 45,000

Total Points Redeemed to 12/31/2018 (15,000+7,950+2,550+15,000) 40,500

Cumulative revenue - 12/31/2018 (P40,500/P45,000 x P875,000) 787,500.00


Revenue Recognized in 2017-2019 525,000.00
Revenue Recognized in 2020 262,500.00
PROBLEM 2 – 5
Coupons to be redeemed (160,000 x 60%) 96,000
Less: Coupons redeemed 40,000
Balance 56,000

1. (96,000/5 = 19,200 x 20) P384,000


2. (56,500/5) x 20 P224,000
PROBLEM 2 – 6
Coupons to be redeemed (500,000 x 80%) 400,000
Less: Coupons redeemed 300,000
Coupons Outstanding 100,000

1. (400,000 x 15) P6,000,000


2. (100,000 x 15) P1,500,000
PROBLEM 2 – 7
Coupons to be redeemed (400,000 x 60%) 240,000
Less: Coupons redeemed 100,000
Coupons Outstanding 140,000
(140,000/5 x P50) P1,400,000
PROBLEM 2 – 8
Coupons expected to be redeemed 12,000
Multiply by payment for each coupon (45+5) 50
Total liability for coupons 600,000
Less: Payments as of December 31, 2017 250,000
Liability for coupons, December 31, 2017 350,000

The coupon liability on Dec. 31, 2017 is not reduced by 5,000


coupons on hand because the coupons had not been processed for
payment
PROBLEM 2 – 9
1. (6,000 x 750) P4,500,000
2. Basketballs to be distributed (100,000x60%/10) 6,000
Basketballs distributed 4,000
Balance 2,000
x Cost of basketballs (4,125,000/5,500) 750
Estimated Liability P1,500,000
PROBLEM 2 – 10
1. (600,000 x 70% x 1.1) 462,000
2. Total coupons issued and to be redeemed 462,000
Less: Total payments to retailer 220,000
Liability for redeemed coupons 12/31/2017 242,000
PROBLEM 2 - 11

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