This
is Memo project
Project
(Assume
US GAAP Under Otherwise Noted)
Windy
Inc. (the “Company”) manufactures needles used to inflate and
deflate sporting
equipment
(e.g., footballs, basketballs, soccer balls). The Company produces
high-quality
stainless
steel needles at a price of $7 per needle.
To
incentivize customers to purchase its needles, the Company utilizes a
customer loyalty
program
(the “Program”) that rewards customers with one loyalty point per
dollar spent.
Customers
can enjoy a $1 credit on future needle purchases for every 25 points
redeemed.
Assume
that the loyalty points are expected to accumulate to an amount that
could
provide
a customer a discount on future purchases that is significant
relative to discounts
provided
to customers that did not participate in the loyalty program.
Additional
facts are as follows:
-
•
Customers
can join the Program for no monetary cost, but must provide an
e-mail address.
-
• Customers
earn zero points for purchases that are paid partially or fully
through redemption of points. -
•
Historically,
95 percent of the points earned under the Program are redeemed.
-
•
The
Company only manufactures one style of needle and recognizes revenue
upon shipment.
-
•
Costs
to acquire a customer and commissions associated with a sale are
both zero.
-
•
Collection
of all invoiced amounts is deemed probable.
On
January 1, 2018, the Company enters into a contract with Larry Inc.
(Larry) to
provide
20,000 needles for a price of $140,000. By joining the loyalty
program, Larry will earn
140,000
loyalty points worth $5,600 ($140,000 ÷ 25). The Company ships all
20,000 needles to
Larry
on January 15, 2018. 2
1.
Do
the loyalty points represent a performance obligation? How do you
know?
2.
Per
IFRS, do the loyalty points represent a performance obligation? How
do you know?
3.
Assume
the loyalty program is structured such that it gives rise to a
material right; what then would be an appropriate stand-alone selling
price of the loyalty points? How do you know?
4.
What
entry/ies should the Company record upon shipping the 20,000 needles
to Larry?
On
August 1, 2018, Larry redeems 14,000 loyalty points and receives 80
needles. As of
August
1, 2018, the Company still believes that 95 percent of the total
points Larry earned will
ultimately
be redeemed.
5.
What
entry/ies should the Company record for the 80 needles shipped on
August 1, 2018?
On
December 1, 2018, Larry redeemed 35,000 loyalty points and ordered
200 needles.
Upon
receiving the order for 200 needles on December 1, 2018, the Company
updates its
estimate
of redemption to 99 percent (for a total additional expected
redemption of
89,600
points).
6.
What
entry/ies should the Company record for the needles shipped on
December 1, 2018?
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