UNIT 2: ACCOUNTING FOR CURRENT LIABILITIES

TOPIC 1 : Premium Liability

PROBLEM #1:
Coupons to be redeemed (160,000 x 60%) 96,000
Coupons redeemed (40,000)
Balance 56,000

1. B.
Premium expense (96,000 / 5 x 20) 384,000

2. B.
Estimated liability (56,000 / 5 x 20) 224,000

PROBLEM #2:
Coupons to be redeemed (500,000 x 80%) 400,000
Coupons redeemed (300,000)
Balance 100,000

1. A.
Premium expense (400,000 x 15) 6,000,000
2. B.
Estimated liability (100,000 x 15) 1,500,000

PROBLEM #3:
Product sales 6,800,000
Points – stand-alone selling (60,000 x 20) 1,200,000
Total 8,000,000

1. A

Allocated price to the points (1.2M / 8M x 6.8M) 1,020,000

2. B
Redemption of 28,800 points in 2021:
Revenue to be recognized in 2021 (28.8k / 60k x 1.02M) 489,600
3. A
Redemption of 9,000 points in 2022:
Points redeemed in 2021 28,800
Points redeemed in 2022 9,000
Total points redeemed to Dec. 31, 2022 37,800
 Cumulative revenue – Dec. 31, 2022
(37.8k / 54k x 1.02M) 714,000
Revenue recognized in 2021 (489,600)
Revenue to be recognized in 2022 224,400

PROBLEM 4:
1. A 4,500,000
2. B
Revenue from points 450,000
Payment to airline (5,000 x 60) (300,000)
Net revenue from points 150,000

PROBLEM 5: Journal Entries from 2021 to 2024

Allocation of transaction price:
Product sales 7,000,000
Points – stand-alone selling price 1,000,000
Total 8,000,000

Product sales (7M / 8M x 7M) 6,125,000

Points (1M / 8M x 7M) 875,000
Total transaction price 7,000,000

The initial sale in 2021 is recorded as follows:

Cash 7,000,000
Sales 6,125,000
Unearned revenue – award credits 875,000

Redemption of 15,000 points in 2021:

Revenue to be recognized in 2021
(15,000 / 40,000 x 875,000) 328,125
2021:
Unearned revenue – award credits 328,125
Sales 328,125

Redemption of 7,950 points in 2022:

Points redeemed in 2021 15,000
Points redeemed in 2022 7,950
Total points redeemed to Dec. 31, 2022 22,950

Cumulative revenue on Dec. 31, 2022

(22,950 / 42,500 x 875,000) 472,500
Revenue to be recognized in 2021 (328,125)
 Revenue to be recognized in 2022 144,375
2022:
Unearned revenue – award credits 144,375
Sales 144,375

Redemption of 2,550 points in 2023:

Points redeemed in 2021 15,000
Points redeemed in 2022 7,950
Points redeemed in 2023 2,550
Total points redeemed to Dec. 31, 2023 25,500

Cumulative revenue – Dec. 31, 2023

(25,500 / 42,500 x 875,000) 525,000
Cumulative revenue – Dec. 31, 2022 (472,500)
Revenue to be recognized in 2023 52,500

2023:
Unearned revenue – award credits 52,500
Sales 52,500

Redemption of 15,000 points in 2024:

Points redeemed in 2021 15,000
Points redeemed in 2022 7,950
Points redeemed in 2023 2,550
Points redeemed in 2024 15,000
Total points redeemed to Dec. 31, 2024 40,500

Cumulative revenue – Dec. 31, 2024

(40,500 / 45,000 x 875,000) 787,500
Cumulative revenue – Dec. 31, 2023 (525,000)
Revenue to be recognized in 2024 262,500

2024:
Unearned revenue – award credits 262,500
Sales 262,500