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Chapter 2 – Premium Liability

Premiums – articles of value such as toys, dishes, silverware, and other goods and in some cases cash
payments given to customers as result of past sales or sales promotion activities

When merchandise is sold, an accounting liability for the future distribution of the premium arises and
should be given accounting recognition

Journal entries:

 For acquisition of premiums:

Premiums xx
Cash xx

 Premiums are distributed to customers:

Premium Expense xx
Premiums xx

 If premiums are still outstanding (recognition of the premium liability)

Premium Expense xx
Estimated Premium Liability xx

Customer Loyalty Program

- for building brand loyalty, retain their valuable customers and increase sales volume
- designed to reward customers for past purchases and to provide them with incentives to make further
- operates in a variety of ways

Awards credits – often described as points; these are what the entity grants to customers, and can be
redeemed by distributing to customers free or discounted goods or services

-an entity shall account for the award credits as a “separately component of the initial sale transaction”
-the granting of award credits is effectively accounted for as a “future delivery of goods or services”

Fair value of the consideration received with respect to the initial sale shall be allocated between the
award credits and sale based on relative stand-alone selling price

Stand-alone selling price – the price at which an entity would sell a promised good or service separately
to a customer

-consideration allocated to the awards credit 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

Estimated redemption rate – assessed each period

Changes in the total number expected to be redeemed do not affect the total consideration for the
award credits, instead, shall be reflected in the amount of revenue recognized in the current and future

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