Question

BOOK Co. follows IFRS and prepares adjusting entries monthly. Starting on January 1, 2019, BOOK offers a new loyalty card where for every 7 books purchased by the customer, the customer receives one book free. Based on industry data, 75% of customers are expected to redeem the free book. All books sell for $10.

In January 2019, 100 books were sold for $1000 cash. (Cost of product was $400.)

In February 2019, customers redeemed 8 of the free books (cost of product was $32).

  

Required: Show and label all calculations.

1. Prepare the journal entries for BOOK for the above transactions for:

1. January 2019
2. February 2019 redemptions

2. What is the gross profit for January 2019 for BOOK?

Answer 1

As per IFRS 15 , Revenue from Contract with Customers , the timing of revenue recognition depends on the timing of fulfilment of promises by the entity. In the given case,, there are two promises that the entity is fulfilling to abide by in the contract of loyalty card.
Promise no.1: The transfer of books to the customer when the customer purchases books, resulting into loyalty cards earned by the customer.
Promise no.2: The transfer of free books to the customer when the customer redeems the loyalty card.
Accordingly the entity is required to allocate the transaction price to the promises. In orderv to do this, the entity shall determine the stand-alone selling price of each promise in isolation, and recognise revenue accordingly.
Calculation of stand-alone selling prices
For sale of 100 books	a		$      1,000.00
For Customer loyalty card
No. of books sold	b	100
No. of free books to be issued	c=b/7	14
No. of Books Expected to be redeem	d=c*75%	11
Stand alone selling price for free books	d=a/b*d		$          110.00
Total Stand alone selling price	$      1,110.00
Allocation of transaction price to the promises
Promise	Stand alone price	Proportion	Revenue
For sale of 100 books	$            1,000.00	90%	$                900
For free Books Expected to be redeem	$               110.00	10%	$                100
	$            1,110.00	100%	$            1,000
1) Journal entry for January 2020
	Dr.	Cr.
Cash	$            1,000.00
To Revenue		$      900.00
To Contract Liability		$      100.00
(Being revenue recognised & contract liab booked for sale of goods)
2) Journal entry for February 2020 redemption
	Dr.	Cr.
Contract Liability	$                  72.73
To Revenue		$        72.73
(Being revenue recognised for redemption of free books)
($100/11 books*8 books)= $72.73
3) Calculation of Gross profit for January 2020
Revenue recognised	(W.N)	$      900.00
Less:
Cost of good sold	(100 books*$4)	$    (400.00)
Gross Profit		$      500.00

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