 Hello and welcome to the session in which we will discuss premium liability for a demable coupon now Here's what companies do companies try different ways to increase their sales. So they might offer you coupons rebate volume discount Free services free goods to do what to increase their sales. So they offer premiums in exchange for coupon offers rebate and the whole purpose is to stimulate sales now if these premiums if these offers reflect a material right promise to the customer so that if they're making a valid promise and that promise arises to a substantial obligation Then a performance obligation exists and should be recorded as a liability Simply put if they are promising to offer something For you as a customer then the company might have a liability because they made a promise to offer you either goods or Services, so this is what we talk about premium liability. So premium liability for redeemable coupons So simply put you can go to the company and tell them look you owe me the service or you owe me this goods So this is this is what a redeemable you can go back to them and tell them You know give me the discount give me this thing for free because you made that promise So premium liability for redeemable coupon refer to the obligation a business has towards its customer Who possess a redeemable coupon some sort of a claim could be a voucher could be a gift card that has not yet been used So if you have a gift card somebody gave it to you You can go back any time and buy goods and services using that coupon using that card The gift cards and they have to sell you the goods and services So these coupon represent a liability again for the company as they are outstanding Commitment for the business to provide goods or services at a discount price or sometime for free Before we proceed any further. I have a public announcement about my company farhat lectures comm Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker Roger Wiley Gleam miles my accounting courses are aligned with your accounting courses broken down by chapter and topics My resources consist of lectures multiple choice questions through false questions as well as exercises Go ahead start your free trial today. No obligation. No credit card required So how do we account for those and accounting for this liability? We typically record unearned revenue or deferred revenue on the balance sheet initially So the company if the company received the payment in other words, if let's assume someone goes into Starbucks and they purchase a gift card for a hundred dollars What would happen Starbucks will debit cash one hundred dollar and they will credit some sort of unearned or The third revenue for one hundred dollars So the company has received the payment or sometimes they don't receive a payment They just make basically made a commitment to provide some sort of a discount But they have not delivered the product or services yet So when the customer redeems a coupon or redeems the gift card The company will recognize the appropriate portion of the unearned revenue So simply put the unearned revenue will go away and will the unearned revenue as revenue and reduces the premium liability So this process continues until all outstanding coupons Have been redeemed or expired simply put they no longer have an application So it's very important for the company to carefully track an account for these premium liabilities To reflect that liability in the financial statement. Think about it If they make a promise that they're gonna give you 20% discount on all future sales to someone Well, guess what? They have to show this liability. Why because in the future they have to deliver their goods and services at a discount So not doing so will mislead the users of the financial statement And it could potentially have issues with regulators and or auditors So it's an obligation that you need to record the best way to illustrate this is to work a couple examples To show you how the concept works Let's assume a bookstore sells gift voucher with a face value of a hundred dollars. So you go there you pay them a hundred dollars Okay, you can give this gift voucher to anyone a customer buys one on March 1st. What entry with the bookstore makes? Well, they will debit cash credit unearned revenue gift voucher Now you can do so you could also go to Farhat lectures and buy gift vouchers For your friends relatives, however, you want them to pass the CPA exam now Later on let's assume April 15 the customers takes this one hundred dollar gift voucher and purchase books from that bookstore Well, what would be the entry? Well, they will debit an earned revenue That's assuming they redeemed the whole voucher and the bookstore will credit revenue because they did earn the revenue Now they also let's assume the cost for the sale is $60 They will debit cost of goods sold and they will credit inventory with that $60 came from it just made it up Just the cost is six. Let's assume the cost for these goods were $60 Let's look at another example So the previous example was basically a gift card where the company received the cash and they have an obligation to deliver Now let's look at another example Let's assume a company issues a premium coupon offering 20% discount on its product And a company like this in the real world if you heard of this company bad bad and beyond they do that They offer basically discount. So the company has a year end December 31st That's the assumption throughout the year. The company issued 500 coupons of these 500 300 were already redeemed by customers Well, if 300 were redeemed by customers by year end, we still have 200 coupon are expected to be redeemed next year Now let's assume that on average The sales value per transaction is $50 on average and the cost for the transaction is 30 This is just basically making assumption. So first we have to calculate the outstanding coupons. How do we do so? Remember, we still have 200 coupon outstanding times $50 200 coupons times $50. That's the total expected sales and we're gonna multiply this by 20% In other words, we're gonna have to give this count a Count for this count of $2,000 total discount. What do we have to do at year end? We have to debit some sort of an expense We're gonna call it this count expense debit and we are going to credit some sort of a liability We're gonna call it an earned discount or some sort of a premium coupon liability of 2000 why because in the future We are responsible for selling the product at 20% discount, which as far as we're concerned That's a $2,000 expense for us. Now. Why do we do that? Why do companies do that? Why bad bath and beyond do that to stimulate sales to increase their sales? They make those, you know, they give you an offer of 20 percent now The following year when the customers come back and they redeem those coupons Basically, what we do is we debit unearned discount, which is a premium liability for the amount Let's assume they redeemed everything 2000 and we will credit the expense of 2000. Okay, the company reversed the liability and recognizes the actual discount amount provided the customer And this is basically how this works. What should you do now? Go to Farnhout Lectures and look at additional resources such as multiple choice, additional exercises, lectures That's gonna help you understand this concept better Whether you are studying for the CPA exam, CMA exam or any other professional certification This is a concept that you need to be comfortable with Basically liabilities. We are dealing with liabilities. Liabilities comes with different format. This is one type of liabilities Good luck everyone. Stay safe and invest in yourself