02 Module 2 Premium Liabilities
02 Module 2 Premium Liabilities
02 Module 2 Premium Liabilities
MODULE 2 PACKET
AE16 – INTERMEDIATE ACCOUNTING 2
MODULE 2 PREMIUM LIABILITIES:
Welcome to Module 2
In this module, we will discuss the conceptual framework in accounting that specifically discusses
premium liabilities. We will review the recognition, measurement and presentation of premium liabilities.
During the discussion, you will provide your appreciation of the different theoretical concepts that are
related to premium liabilities as well as the accounting treatment of transactions related to premium
liabilities. At the end of this module, you will be required to respond to questions that are designed to test
your understanding of the concepts and their application in the recognition, measurement and
presentation to the financial statements of premium liabilities.
LEARNING OUTCOMES:
PRINTED REFERENCES
1. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Conceptual framework and accounting
standards. 2019 edition. Manila : GIC Enterprises & Co., Inc. FIL 657.0218 V173c 2019
2. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume one.
2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 1
3. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume two.
2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 2
4. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume three.
2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 3
5. Cabrera, M. E. B. & Cabrera, G. A. B. (2019). Financial accounting and reporting
fundamentals. 2019-2020 edition. FIL 657.48 C117f 2019
6. Millan, Zeus Vernon B. Intermediate Financial Accounting II. Baguio City: Bandolin
Enterprise 2016
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 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 @ P50 each 100,000
Wrappers redeemed 4,000
Accounting entries
1. To record the sales
Cash 3,000,000
Sales 3,000,000
2. To record the purchase of the premiums
Premiums – soup bowls 100,000
Cash 100,000
3. To record the redemption of 4,000 wrappers
Cash (800* x P10 redemption price) 8,000
Premium Expense (800 x P40**) 32,000
Premiums – soup bowls 40,000
*4,000 wrappers / 5 wrappers = 800 bowls to be distributed
**P50 cost/bowl less P10 - redemption price = P40/bowl
5. At the end of the year, the accounts related to the premium plan are
classified and presented in the financial statements as follows:
Balance Sheet
Current Asset
Premiums – Soup Bowls 60,000
Current Liability
Estimated Premium Liability 16,000
Income Statement
Distribution (Selling) Cost
Premium Expense 48,000
The balance of the Estimated Coupon Liability at the end of the year will be
P550,000.
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.
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.
The calculation of the revenue to be recognized in any one period is made on a
“cumulative bases” in order to reflect the changes in estimate.
ILLUSTRATION 1
A grocery retailer operates a customer loyalty program.
The grocery 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 P9,000,000 based on stand-alone selling
price.
During 2020, the customers earned 10,000 points.
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 P100.
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.
Computations
Allocation of transaction price
Product sales 9,000,000
Points-stand-alone selling price (10,000 x 100) 1,000,000
Total 10,000,000
Allocation of Sales
Product sales (9,000,000/10,000,000 x 9,000,000) 8,100,000
Points (1,000,000/10,000,000 x 9,000,000) 900,000
Total Transaction Price 9,000,000
Accounting Entries
1. Initial sale in 2020
Cash 9,000,000
Sales 8,100,000
Unearned Revenue – Points 900,000
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 P4,500,000 based on stand-alone selling price and granted 5,000
points with stand-alone selling price of P100 each point.
Solution
5,000,000.00 4 ,500,000.00
Cash 300,000