Question

Bramble van Leeuwen operates a very busy roadside fruit and vegetable stand from May to October every year as part of his farming operation, which has a December 31 year end and uses ASPE. Each time a customer purchases over $10 of produce, Bramble gives the customer a special fruit-shaped sticker that can’t be copied. If a customer collects 10 of these stickers, they can have $10 worth of produce for no charge. The stickers must be redeemed by June 30 of the following year. During the current year, 21,000 stickers were given out to customers. Bramble knows from experience that some stickers will never be cashed in, as the customer may not shop at his stand frequently enough to collect 10 stickers, or they get lost or forgotten. In previous years, 11% of stickers have been redeemed. During the current year, 7% of the stickers given out were redeemed. Bramble uses the expense approach to account for premiums and estimates that product costs are 60% of their selling prices.

Determine the amount that should be reported as premium expense on the December 31 income statement and the amount of any liability at December 31. CA Premium Expense Estimated Liability for Premiums $ e Textbook and Media

Answer 1

Answer

During the current year, 21,000 stickers were given out to customers.

In previous years, 11% of stickers have been redeemed.

During the current year, 7% of the stickers given out were redeemed.

Expected redemption rate is not given, So, for current year let's assume expected redemption rate is 11%.

If a customer collects 10 of these stickers, they can have $10 worth of produce for no charge. i.e $1 woth of produce for 1 stickers.

product costs are 60% of their selling prices.

1)

Calculation of Premium Expense:

During the current year outof 21000 stickers, 7% were redeemed = 1470 stickers  

Premium Expense = 1470 stickers x $1 x 60%

Premium Expense = $882

Calculation of Estimated liability for premium:

Outof estimated 11%, 7% stickers were redeemed,

For remaining 4%, Estimated liability for premium would be recorgnised.

Estimated liability for premium = 21000 x 4% x $1 x 60%

Estimated liability for premium = $504

2)

Journal Entry:

Account Tital & Explanation	Debit	Credit
Premium Expense	$882
To Inventory		$882
( By recording the cost of free product given in exchange when stickers are redeemed

Premium Expense	$504
To Estimated liability for premium		$504
(By recording te liability of unredeemed stickers)

3) Calculation as per IFRS:

Here, there are also 2 performance obligations:

1. Goods sold, and
2. Material right – Stickers

The transaction price is 21000*$10 = $2,10,000, because customers collected 21000 stickers for every $10 purcase.

The stand-alone selling prices of goods is the same as the transaction price – $2,10,000.

Bramble expects 11% x 21000 stickers to be redeemed, so their stand-alone selling price is $2310.

Let’s perform the allocation:

Performance obligation	Stand-alone selling price	Allocated transaction price
Goods	$2,10,000	$2,07,715
Material right	$2,310	$2,285
Total	$2,12,310	$2,10,000

Journal Entry:

recognizes the revenue for the goods sold as follows:

Account Tital & Explanation	Debit	Credit
Premium Expense	$2,10,000
To Revenues from goods sold:		$2,07,715
To Contract liability		$2,285

when the stickers are redeemed, then recognize the revenue from the stickers.

Account Tital & Explanation	Debit	Credit
Contract liability($2285 x 7%/11%)	$1,454
To Revenues from goods sold:		$1,454
(by recording current year 7% stickers redeemed)