Question

Jerry’s Ice Cream Parlor is considering a marketing plan to increase sales of ice cream cones. The plan will give customers a free ice cream cone if they buy 10 ice cream cones at regular prices. Customers will be issued a card that will be punched each time an ice cream cone is purchased. After 10 punches, the card can be turned in for a free ice cream cone. Jerry Donovna, the company’s owner, is not sure how the new plan will affect accounting procedures. He realizes the company will be incurring costs each time a free ice cream cone is awarded but there will be no corresponding revenue or cash inflow.

Prepare a memo detailing how revenue recognition will change if the new plan is implemented. Your memo should include specific revenue recognition accounting terminology from the text as well as journal entry(ies).Prepare a memo detailing how revenue recognition will change if the new plan is implemented. Your memo should include specific revenue recognition accounting terminology from the text as well as journal entry(ies).

Answer 1

As per IFRS 15 a free gift are the separate performance obligation that need to be accounted separately and a portion of the selling price is to be allocated to the free item sold. When revenue on the primary performance obligations recognized over time, this can result in earlier revenue recognition on a portion of the selling price relating to free item sold.

In this problem Jerry’s Ice Cream Parlor is giving a free ice cream on purchase of 10 ice cream to customers is a sales incentive and sales price of 10 ice cream will be recognized as revenue for 11 ice cream proportionally. Journal entries would be

                Debit Cash

                        Credit Revenue on sale of ice cream

                        Credit Deferred gift card revenue

However as per current practice under IAS 18, is to recognize the revenue on sale of 10 ice cream on regular sale value and expensed the cost of 1 free ice cream when it is given free to customer.