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  1. Premiums Premiums are articles of value such as toys, dishes, silverware and other goods given to customers as a result of past sales or sales promotions activities. Accordingly, when the merchandise is sold, an accounting liability for the future distribution of the premium arises and should be given accounting recognition.
  2. • When the premiums are purchased: Premiums xxx Cash xxx • When the premiums are distributed to customers: Premium Expense xxx Premiums xxx • At the end of the year, if premiums are still outstanding Premium Expense xxx Estimated Premium Liability xxx
  3. 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 P10. The bowl costs P50 and it is estimated at 60% of wrappers will be redeemed.
  4. The data for the first year concerning the premium plan are summarized. 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
  5. The data for the first year concerning the premium plan are summarized. 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
  6. Journal Entries • To record the sales: Cash 3,000,000 Sales 3,000,000 • To record the purchase of the premiums: Premiums – soup bowls 100,000 Cash 100,000
  7. • To record the redemption of 4,000 wrappers: Cash (800 x 10) 8,000 Premium Expense (800 x 40) 32,000 Premiums – soup bowls (800x50) 40,000 • To record the liability for the premiums at the end of the first year: Premium Expense 16,000 Estimated Premium Liability 16,000
  8. Computation: Wrappers to be redeemed (60% x 10,000 wrappers) 6,000 Wrapper redeemed (4,000) Wrappers Outstanding 2000 Premiums to be distributed (2,000/5) 400 Estimated liability (400 x 40) 16,000
  9. Financial Statement Classification At the end of the year, the accounts related to the premium plan are classified as: Current Assets: Premiums – soup bowls 60,000 Current Liability: Estimated Premium Liability 16,000 Distribution Cost: Premium Expense 48,000
  10. Coupon In a contract of sale of goods, an entity may offer customer incentives with the end in view of stimulating sales.
  11. IFRS 15, paragraph 22, provides that at contract inception, an entity shall assess the goods promised in a contract with customer shall identify as a performance obligation each promise to transfer to the customer either: • A distinct good • A series of distinct goods that are substantially the same and that have the same pattern of transfer to the customer
  12. Under paragraph B40, such options to purchase additional goods provide the customer a material right and therefore gives rise to a performance obligation that the seller must satisfy. 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.
  13. Accordingly, the entity has two performance obligations in these customer options, namely: • To deliver or transfer the goods or product sold. • To satisfy the customer options for coupons for free product, discount and rebate.
  14. 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 options shall be deferred and recognized as income when options are exercised or when the option expire.
  15. CASH DISCOUNT COUPON 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.
  16. Illustration; Case Cereal Company distributed coupons to promote new products. On October 1, 2019, the entity mailed 100,000 coupons for P45 off each box of cereal purchased. The entity expected 12,000 of these coupons to be redeemed before the December 31, 2019 expiration date.
  17. It takes 30 days from the redemption date for the entity to receive the coupons from the retailers. The entity reimbursed the retailers an additional P5 for each coupon redeemed. On December 31, 2019, the entity had paid retailers P250,000 related to these coupons and had 5,000 coupons on hand that had not been processed for payment.
  18. Compute for liability for coupons on December 31, 2019. Solution: Coupons expected to be redeemed 12,000 Payment for each coupon (45+5) x 50 Total coupon liability 600,000 Payments on December 31, 2019 (250,000) Liability for coupons, December 31,2019 350,000
  19. Entries: 1. To recognize the cash discount coupon offer: Cash discount coupon expense (12,000 x 50) 600,000 Estimated coupon liability 600,000 2. To record payments to retailers: Estimated coupon liability 250,000 Cash 250,000
  20. CASH REBATE PROGRAM Cash register receipts, bar codes, rebate coupons and other proof of purchase often can be mailed to the manufacturer for cash rebate. Accordingly, the estimated amount of cash rebate should be recognized both as an expense and an estimated liability in the period of sale.
  21. Illustration Energy Company offered a cash rebate of P20 on each P150 package of batteries sold during the current year. Historically, 10% of customers mail in the rebate form. During the year, 600,000 packages of batteries are sold, and 25,000 P20 rebates are mailed to customers
  22. 1. Compute for rebate expense for the current year Rebate expense (600,000 packages x 10% x P20) 1,200,000 To recognize the cash rebate program: Rebate expense 1,200,000 Estimated rebate liability 1,200,000
  23. Compute for rebate liability at year end Rebate coupons issued (600,000 x 10%) 60,000 Rebate coupons redeemed (25,000) Rebates outstanding 35,000 Rebate liability (35,000 x P20) 700,000
  24. To record the payment to customers: Estimated rebate liability (25,000 x 20) 500,000 Cash 500,000