PREMIUMS

Problem 1
Lancer Company inaugurated a promotional campaign on January 2, 2019 to promote the salability of their product. Lancer
Company placed a coupon redeemable for a premium in each package of cereal sold at P200. Each premium costs P25
and 10 coupons must be presented by a customer to receive a premium. Lancer estimated that only 70% of the coupons
issued would be redeemed. During the year, the following transactions occurred:

Packages of cereal sold – 120,000

Premium purchased – 30,000
Coupons redeemed – 54,000

1. Prepare Journal entry.

2. Determine the total premium expense for the year.
3. Determine the balance of estimated liability for the coupons at the end of the year.

Problem 2
Broad Company includes in packages of the products, coupons that may be presented to retail stocks to obtain discounts
on other Broad Company products. Retailers are reimbursed for the face amount of coupons redeemed plus 10% of that
amount for handling costs. The company honors requests for coupon redemption by retailers up to three months after
the coupon expiration date. The company estimates that 70% of all coupons issued will ultimately be redeemed.
Information relating to coupons issued by the company during 2019 is as follows:

Consumer expiration date – December 31, 2019

Total face amount of coupons issued – P600,000
Total payments to retailers as of Dec. 31, 2019 – P220,000

1. Prepare Journal entry.

2. Determine the year-end balance of estimated liability that is expected to be paid to the retailers.

Problem 3
During 2019, Mallow Company sold 500,000 boxes of hotcakes under a new sales promotional program. Each box contains
one coupon, which when submitted with P16, entitles the customer to a baking pan. Mallow pays P20 per pan and P2 for
handling and shipping. Mallow estimates that 80% of the coupons will be redeemed, even though only 300,000 coupons
had been processed during 2019. What amount should Mallow report as a liability for unredeemed coupons at December
31, 2019?

WARRANTY

Problem 1
Male Company sells calculators that carry a one-year warranty against the manufacturer’s defects. Based on Company
experience, warranty costs are estimated at P200 per calculator. The company assumes 60% of the items sold will be
returned for repair. During 2019, Male sold 24,000 calculators and paid warranty costs of P170,000. Solve for warranty
expense and warranty liability to be reported at the end of the year.

Problem 2
A new product introduced by Beauty Promotions carries a two-year warranty against defects. The estimated warranty
costs related to sales are as follows:
Year of sale – 3%
Year after sale – 5%

Sales and actual warranty expenditure for the years ended Dec 31, 2018 and 2019 are as follows:
 Sales Actual warranty Expenditures
2018 P800,000.00 P20,000
2019 1,000,000.00 70,000

Solve for the amount of warranty liability as of December 31, 2019

Problem 3
Charming Company estimates its annual warranty expense as 2% of annual net sales. The following data relate to calendar
year 2019.
Net Sales P3,000,000
Warranty Liability account:
Balance, January 1, 2018 P10,000 debit before adjustment
Balance, December 31, 2018 P54,000 credit after adjustment

What was the entry to record the estimated warranty expense?

PREMIUMS and WARRANTY Combined

Jackson Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music,
and sheet music. Jackson uses two sales promotion techniques namely (a)warranties and (b) premiums, to attract
customers.

Musical instruments and sound equipment are sold with a one-year warranty for replacement of parts and labor. The
estimated warranty cost, based on past experience is 2% of sales.

The premium is offered on the recorded and sheet music. Customers receive a coupon for each P20 spent on recorded
music or sheet music. Customers may exchange 200 coupons and P100 for a MP3 player. Jackson pays P250 for each MP3
player and estimates that 60% of the coupons given to the customers will be redeemed.

Jackson’s total sales for 2019 were P10,600,000: P7,400,000 from musical instruments and reproduction equipment and
P3,200,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled P164,000 during
2019. A total of 650 mp3 players used in the premium program were purchased during the year and there were 120,000
coupons redeemed in 2019.

The actual method is used by Jackson to account for the warranty and premium costs for financial reporting purposes.
The balances in the accounts related to warranties and premiums on January 1, 2019 are shown below:

Inventory of MP3 players P 37,750

Estimated premium claims outstanding 43,950
Estimated liability from warranties 136,000

1. Warranty expense & premium expense

2. Estimated liability from warranties
3. Inventory of mp3 players
4. Estimated premium claims