Question

Bikes Ltd. offers customers a loyalty card whereby customers receive a stamp every time they have their bike tuned up. Upon presentation of 5 stamps, customers are entitled to receive a bike light for $5. It is expected that 75% of the stamps will be redeemed. Tune-ups cost $20 and retail for $50 each; lights cost $10 and retail for $25. 1,000 lights have been purchased as prizes. In 20X9, 6,000 tune-ups were completed and 750 lights were given out. Bikes use the residual value method to allocate the transaction price to performance obligations. Required: (a) Assume Bikes Ltd. is a public company using IFRS. Calculate the following balances at Bikes year ended December 31, 20X9: total revenue, premium expense, premium inventory, and unearned revenue. Clearly indicate whether each balance is a debit or credit. (b) Assume Bikes Ltd. is a private company using ASPE. Calculate the following balances at Bikes year-ended December 31, 20X9: total revenue, premium expense, premium inventory, and estimated liability for premiums. Clearly indicate whether each balance is a debit or credit.

Answer 1

Explanation:

Question 1

• The premium inventory is the value of the prizes that have not been given out yet, which in this case would be the 750 lights that were not given out, multiplied by the $25 retail price, for a total of $18,750.
•  The unearned revenue is the amount of money that the company has collected from customers for the tune-ups, but has not yet earned, which in this case would be the 6,000 tune-ups multiplied by the $20 cost, for a total of $120,000.

Question 2

• At Bikes' year-end December 31, 20X9, the premium charge would be credited $75,000. This is due to the fact that the premium expense is recognized only after the performance obligation is met. When the customer receives the light, which is when the premium charge is incurred, the performance obligation is fulfilled.
• At Bikes' year-end December 31, 20X9, the premium inventory would be deducted $10,000. This is because when the performance obligation is met, the premium inventory is recognized. When the customer receives the light, which is when the premium inventory is incurred, the performance obligation is fulfilled.
• At Bikes year-end December 31, 20X9, the expected liability for premiums would be credited $15,000. Because the estimated premium liability is recognized when the performance obligation is met, this is the case. In this situation, the customer's performance requirement is fulfilled when the light is turned on, which is also when the projected premium liability is incurred.

Question 1

• Total revenue is the total amount of money that a company has earned through the sale of its products or services. In this case, the total revenue would be the 6,000 tune-ups that were completed, multiplied by the $50 retail price, for a total of $300,000.
•  The premium expense is the amount of money that the company has spent on the prizes, which in this case would be the 1,000 lights that were purchased at a cost of $10 each, for a total of $10,000.

Question 2

• Assuming Bikes Ltd. is a private company using ASPE, the total revenue, premium expense, premium inventory, and estimated liability for premiums at Bikes year-ended December 31, 20X9 would be as follows: Total revenue: Debit $600,000 Premium expense:
•  Credit $75,000 Premium inventory: Debit $10,000 Estimated liability for premiums: Credit $15,000 Assuming Bikes Ltd. is a private company using ASPE, the total revenue at Bikes year-ended December 31, 20X9 would be debited $600,000.
•  This is because, under ASPE, revenue is recognized when it is earned, which is when the performance obligation is satisfied. In this case, the performance obligation is satisfied when the customer receives the light, which is when the revenue is earned.