Refer a Friend Study Case

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June 9, 2015 Case 13-01 Refer-a-Friend Program Required: 1. How should the $25 Referral Credit be recorded in Runway’s Income Statement — as a reduction of revenue or as a marketing expense? Cost of $25 gift card can be referred as marketing expense since it would cost the same amount to acquire a new customer from unrelated third party or marketing firm who is not purchaser of its products. Revenue recognition has been depicted in FASB codification 605-50-25-3 according to which, a sales incentive offered voluntarily by a vendor (the Company) and without charge to customers that can be used or that becomes exercisable by a customer as a result of a single exchange transaction shall recognize the cost of such a sales incentive at the later of the following: The date at which the related revenue is recognized by the vendor (the Company) The date at which the sales incentive is offered. 2. A) When would Runway record the $25 Referral Credit? B) What are the entries Runway would record when the $25 Referral Credit is earned by the Existing Customer? C) What are the entries Runway would record when the $25 Referral Credit is redeemed against a $100 purchase made by the Existing Customer? a. The Company would recognize and record $25 Referral Credit when the existing customer redeems this credit at the time of future purchase from the Company. b. According to IAS on Provisions, Contingent Liabilities and Contingent Assets 37.86, the Company should not recognize contingent liabilities (a possible obligation depending on whether some uncertain future event occurs) but should disclose them, unless the possibility of an outflow of economic resources is remote. Since the incurrence of cost of $25 Referral credit depends on future event of existing customer future purchase and use of this credit therefore the Company should not provide for this cost but

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