IA2 - Premiums and Warranties PracFin Reviewer

Galit Company inaugurated a sales promotional campaign on June 30. The entity placed a coupon redeemable for a premium in each package of cereal sold.

Each premium cost P20 and five coupons must be presented by a customer to receive a premium. The entity estimated that only 60% of the coupons issued would be redeemed. For six month ended December 31, the following information is available:

Packages Sold - 160,000

Premium Purchased - 12,000

Coupons Redeemed - 40,000

WHAT IS THE ESTIMATED PREMIUM LIABILITY ON DECEMBER 31?

• 384,000

• 288,000

• 224,000

• 160,000

Godfrey Company includes one coupon in each box of laundry soap it sells. A towel is offered as a premium to customers who send in 10 coupons and a remittance of P10.

Distribution cost of premium is P5. Experience indicated that only 30% of the coupons will be redeemed.

Boxes of Soap Sold - 2,000,000 (2023) 2,500,000 (2024)

Number of Towels Purchased at P50 each - 50,000 (2023) 80,000 (2024)

Coupons Redeemed - 400,000 (2023) 700,000 (2024)

WHAT IS THE ESTIMATED PREMIUM LIABILITY FOR DECEMBER 31, 2024?

• 900,000

• 2,250,000

• 2,350,000

• 1,125,000

Arwen Company included one coupon in each package sold. A premium is offered to customers who send in 10 coupons.

Number of Packages Sold - 500,000 (2023) 800,000 (2024)

Number of Premiums Purchased at P40 each - 30,000 (2023) 800,000 (2024)

Number of Premiums Distributed - 20,000 (2023) 50,000 (2024)

Number of Premiums to be Distributed Next Period - 5,000 (2023) 3,000 (2024)

WHAT IS THE PREMIUM EXPENSE FOR 2024?

• 1,920,000

• 2,400,000

• 2,000,000

• 2,120,000

Tishri Company sells bedsheets for P3,000 per set. There is a promotion wherein if a customer buys 4 sets in a single transaction, the customer receives a coupon for one additional set for free. It is expected that 80% of the coupons will be redeemed. During 2023, the entity sold 1,000 sets at P3,000 per set or P3,000,000. During 2024, the entity delivered 75 free additional sets.

WHAT SHOULD BE REPORTED AS DEFERRED REVENUE FROM COUPONS ON DECEMBER 31, 2024?

• 150,000

• 350,000

• 500,000

• 0

Charles Company is a retailer that sells clothing. The entity has launched a promotional campaign whereby if customers buy clothing with a single purchase of at least P4,000, the entity shall issue "30% discount coupons" on selected items. The coupons may be used for 3 months following the campaign.

During the current year, the entity sold clothing worth P5,400,000 and issued 500 "30% discount coupons". The entity expected that 80% of the coupons will be redeemed and customers using the coupons buy clothing at an average price of P5,000.

WHAT AMOUNT SHOULD BE RECORDED AS THE SALES REVENUE FROM THE REDEMPTION OF COUPONS?

• 1,940,000

• 1,750,000

• 1,400,000

• 2,500,000

Imee Company is a manufacturer and sells its products to retailers. Retailer sell the product to its customers and for each product purchased by the customers, a rebate discount coupon of P50 is given and may be used on future purchase of the same product. Retailers are reimbursed for the discount by the manufacturer upon redemption of the coupons.

During the current year, the entity sold 30,000 products to the retailers at P150 each or P4,500,000.

It is expected that 75% of the coupons will be redeemed. At year-end, the manufacturer paid the retailers P500,000 as reimbursement.

WHAT SHOULD BE REPORTED AS REBATE LIABILITY AT YEAR-END?

• 500,000

• 900,000

• 625,000

• 400,000

During the current year, Charzen Company sold gift certificates worth 8,000,000 to customers in exchange for future delivery of its product. The certificates are non-refundable and entity expected that 15% of the certificates will not be redeemed. During the year, the entity redeemed gift certificates worth P5,100,000.

Expected Value of Breakage 1,200,000

Expected Value of Certificates to be Redeemed 6,800,000

WHAT AMOUNTS OF BREAKAGE REVENUE AND DEFERRED REVENUE SHOULD BE REPORTED AT YEAR-END?

• 900,000 // 2,000,000

• 1,200,000 // 5,600,000

• 180,000 // 2,900,000

• 1,200,000 // 6,800,000

Paula Company, 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.

During 2023, sales amounted to P7,000,000 based on stand-alone selling price.

During 2023, the entity granted 10,000 points. But management expected that only 80% or 8,000 points will be redeemed. The stand-alone selling price of each point is P100.

On December 31, 2023, 4,800 points have been redeemed.

In 2024, management revised its expectations and now expected that 90% or 9,000 points will be redeemed altogether.

During 2024, the entity redeemed 2,400 points.

WHAT SHOULD BE THE REPORTED REVENUE FROM LOYALTY POINTS IN 2023 AND 2024?

• 525,000 // 175,000

• 500,000 // 200,000

• 225,000 // 475,000

• 490,000 // 210,000

Clarence Company operates a customer loyalty program. The entity grants program members loyalty points when they spend a specified amount on purchases. The loyalty points can be used by the customers in exchange for goods of the entity. The points have no expiry date.

During 2023, the entity issued 50,000 award points and expected that 80% of these will be redeemed. Thev total stand-alone selling price of the credits is reliably measured at P1,000,000.

In 2023, the entity sold goods to customers for a total consideration of P7,000,000 based on stand-alone selling price.

The award credits redeemed and the total award credits expected to be redeemed each year are:

2023 15,000 (REDEEMED) 80%

2024 7,950 85%

2025 2,550 85%

2026 15,000 90%

WHAT IS THE REVENUE FROM POINTS FOR 2026?

• 183,750

• 787,500

• 262,500

• 131,250

Mika Company estimated the annual warranty expense to be 5% of annual net sales. The net sales for the current year amounted to P10,000,000. At the beginning of the current year, the warranty liability was P120,000 and the warranty payments during the current year totaled P100,000.

WHAT AMOUNT SHOULD BE REPORTED AS WARRANT EXPENSE AND WARRANTY LIABILITY AT YEAR-END?

• 520,000 // 510,000

• 500,000 // 510,000

• 510,000 // 520,000

• 500,000 // 520,000