Premiums, coupons, and cash rebates given to customers to promote sales are accounted for as liabilities at the time of sale. When premiums are purchased, an asset is recorded. As premiums are distributed to customers, an expense is recorded to reduce the liability. At year-end, any remaining liability is estimated based on expected future redemptions. The transaction price from goods sold must be allocated between the products and any customer options, like coupons, based on standalone selling prices.

2. 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.

3. • 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

4. 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.

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. 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

7. 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

8. • 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

9. 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

10. 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

11. Coupon
In a contract of sale of goods, an entity may offer
customer incentives with the end in view of stimulating
sales.

12. 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

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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

20. 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

21. 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.

22. 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

23. 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

24. 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

25. To record the payment to customers:
Estimated rebate liability (25,000 x 20) 500,000
Cash 500,000