Chapter 2 - Premium And Warranty Liability

Question 1

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

Answer 1

Sold

Question 2

The accounting procedures for the acquisition of premiums and recognition of the premium liability are as follows

When the premiums are purchased:

Answer 2

Premiums. Xx

Cash. Xx

Question 3

The accounting procedures for the acquisition of premiums and recognition of the premium liability are as follows

When the premiums are distributed to customers:

Answer 3

Premium Expense. Xx

Premiums. Xx

Question 4

The accounting procedures for the acquisition of premiums and recognition of the premium liability are as follows

At the end of the year, if premiums are still outstanding:

Answer 4

Premium Expense. Xx

Estimated Premium Liability. Xx

Question 5

Many entities use a _____ to build brand loyalty, retain their valuable customers, and of course, increase sales volume

Answer 5

Customer loyalty program

Question 6

Generally designed to reward customers for past purchases and to provide them with incentives to make further purchases

Answer 6

Customer loyalty program

Question 7

If a customer buys goods or services, the entity grants the customer _____ often described as “points”

Answer 7

Award credits

Question 8

The entity can redeem the _____ by distributing to the customer free or discounted good or services

Answer 8

Points

Question 9

An entity shall account for the award credits as a _____.

Answer 9

Separately component of the initial sale transaction

Question 10

The granting of award credits is effectively accounted for as a _____

Answer 10

Future delivery of goods or services

Question 11

The fair value of the consideration received with respect to the initial sale shall be _____

Answer 11

Allocated between the award credits and the sale

Question 12

The consideration allocated to the award credits is measured at _____.

Answer 12

Fair value

Meaning, the amount for which the award credits could be measured separately

Question 13

The subsequent recognition of the amount allocated to the award credits as revenue depends on the following (2)

Answer 13

A. The entity supplies the awards itself

B. A third party supplies the awards

Question 14

If the entity supplies the award itself, the consideration allocated to the award credits is initially recognized as _____ and subsequently recognized as _____ when the award credits are redeemed

Answer 14

Deferred revenue

Revenue

Question 15

R: 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.

Answer 15

Okay

Question 16

The estimated redemption rate is assessed _____.

Answer 16

Each period

Changes in the total number expected to be redeemed do not affect the total consideration for the award credits

Question 17

If the entity supplies the awards itself, the changes in the total number of award credits expected to be redeemed shall be reflected in the amount of _____ recognized in the current and future periods.

Answer 17

Revenue

Question 18

If the entity supplies the awards itself, the calculation of the revenue to be recognized in any one period is made on a _____ in order to reflect the changes in estimate

Answer 18

Cumulative basis

Question 19

If a third party supplies the awards, the entity shall assess whether it is collecting the consideration allocated to the award credits on its own account as _____ in the transaction, or on behalf of the third party as _____ of thebthird party

Answer 19

Principal

Agent

Question 20

Whether principal or agent, the revenue from the revenue from the award credits is recognized at the _____”

Answer 20

Point of Sale

The entity has already fulfilled its obligation to the customer by granting the award credits and the third party is obliged to supply the awards and of course entitled to receive consideration for doing so

Question 21

If the entity is collecting the consideration as principal in the transaction, the amount of revenue is equal to the _____ allocated to the award credits

Answer 21

Gross consideration

Question 22

If the entity is collecting the consideration as agent of the third party, the amount of revenue is equal to the _____ retained in its own account

Answer 22

Net amount

This net amount is the difference between the consideration allocated to the award credits and the amount payable tonthebthird party for supplying the awards.

Question 23

Home appliances like television sets, stereo sets, refrigerators, and the like are often sold under guarantee or warranty to provide free repair service or replacement during a specified period if the products are defective.

Answer 23

Warranty

Question 24

If the products sold prove to be defective in the future within the specified period of time, accordingly, at the point of sale, _____.

Answer 24

A liability is incurred

Question 25

Two approaches in accounting for the warranty cost, namely

Answer 25

“Accrual” approach

“Expense as incurred” approach

Question 26

The _____ approach in accounting for warrant cost has the soundest theoretical support because it properly matches cost with revenue.

Answer 26

Accrual

Question 27

Ag the time of sale, a liability for warranty cost arises and therefore should be given accounting recognition.

Answer 27

Accrual approach

Question 28

Following the accrual approach, the estimated warranty cost is recorded as follows:

Answer 28

Warranty Expense. Xx

Estimated Warranty Liability. Xx

Question 29

In accrual approach, when ACTUAL warranty cost is subsequently incurred and paid, the entry is:

Answer 29

Estimated warranty liability. Xx

Cash. Xx

Question 30

Any difference between estimate and actual cost is a _____.

Answer 30

Change in estimate

And therefore treated currently or prospectively, if necessary.

Question 31

If the actual cost exceeds the estimate, the difference is charged to warranty expense as follows:

Answer 31

Warranty expense. Xx
Estimated warranty liability. Xx

The subsequent payment of the warranty cost is then charged to the estimated liability account.

Question 32

If the actual cost is less than the estimate, the difference is an adjustment to warranty expense as follows:

Answer 32

Estimated warranty liability. Xx

Warranty expense. Xx

Question 33

The approach of expensing warranty cost only when actually incurred.

Answer 33

Expense as incurred approach

Question 34

This approach is the one recognized for income tax purposes and frequently justified on the basis of expediency when warranty cost is not very substantial or when the warranty period is relatively short.

Answer 34

Expense as incurred approach

Question 35

A warranty is sometimes sold separately from the product sold

Answer 35

Sale of warranty

Question 36

The seller may offer an _____ on the product sold BUT WITH ADDITIONAL COST.

Answer 36

“Extended warranty”

Question 37

The sale of the product is recorded _____ from the sale of the extended warranty.

Answer 37

Separately

Question 38

The amount received from the sale of the extended warranty is recognized initially as _____

Answer 38

Deferred revenue

And subsequently amortized using straight line over the life of the warranty contract

Question 39

If costs are expected to be incurred in performing services under the extended warranty contract, _____ is recognized in proportion to the costs to be incurred annually.

Answer 39

Revenue

Question 40

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.

Answer 40

Premiums