Question

Packers 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 $5 per needle.

To incentivize customers to purchase its needles, the Company created a customer loyalty program (the “Program”) that rewards customers with one loyalty point per dollar spent. For every 20 points earned, the customer can redeem those points for a $1 credit toward future needle purchases.

As customers’ points accumulate, the Company expects the points will influence customer behavior because it is expected that customers will be able to earn free goods. Customers can join the Program for no fee by providing their e-mail address. Loyalty points are not earned when purchases are paid for via redemption of loyalty points.

Historically, 95 percent of the points earned under the Program are redeemed.

Assume, for purposes of this case, 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.

Case Facts:

• The Company only manufactures one style of needle and recognizes revenue upon shipment.

• There are no costs to acquire a customer or commissions associated with a sale.

• For purposes of this case, collection of all invoiced amounts is deemed probable.

Details

On January 1, 2019, the Company enters into a contract with Rodgers Inc. (Rodgers) to provide 10,000 needles for a total of $50,000. By joining the loyalty program, Rodgers will earn 50,000 loyalty points worth $2,500 ($50,000 ÷ 20).

The Company ships all 10,000 needles to Rodgers on January 15, 2019.

Required:

1. Do the loyalty points represent a performance obligation?

2. Assuming the loyalty program is structured such that it gives rise to a material right, what would be an appropriate stand-alone selling price of the loyalty points?

3. What journal entries should the Company record when all 10,000 needles are shipped to Rodgers?

August 1, 2019, Transaction

On August 1, 2019, Rodgers redeems 10,000 loyalty points and receives 100 needles. As of August 1, 2019, the Company still believes 95 percent (37,500 additional) of the loyalty points will be redeemed.

Required:

4. What entries should the Company record for 100 needles shipped on August 1, 2019?

December 1, 2019, Transaction

On December 1, 2019, Rodgers redeems 20,000 loyalty points and ordered 200 needles. Upon receiving the order for 200 needles on December 1, 2019, the Company updates its estimate of redemption to 98 percent (for a total of 49,000 points, or an additional 19,000 points expected be redeemed).

Required:

5. What entries should the Company record for 200 needles shipped on December 1, 2019?

Answer 1

Ans. 1 The loyalty points issued by a company to its customers give a material right to the customer which he may exercise by redeeming the points at a future date. Therefore, loyalty points represent a performance obligation on the part of the company.

Ans. 2. No. of loyalty points = 1point per $1 spent

So, $50,000 = 50,000 points

95% points are redeemed under the program,

So, 95% * 50,000 = 47,500 points are likely be redeemed

For every 20 points, customer can buy worth $1

So, standalone selling price of loyalty points = 47,500 / 20 = $2,375

Ans. 3. For recording journal entry upon shipment of 10,000 needles to Rodgers, first transaction price,i.e,$50,000 needs to be allocated between goods sold and material rights (i.e. loyalty points)

Allocation of the transaction price between goods sold and loyalty points based on proportion of standalone selling prices:

Proportion of goods sold in standalone selling prices = $50,000 / ($50,000 + $2,375) * 100

= 95.47%

Proportion of loyalty points in standalone selling prices= $2,375 / ($50,000 + $2,375) * 100

=4.53%

Allocation of transaction price to goods sold = $50,000 * 95.47%

= $47,735

Allocation of transaction price to loyalty points = $50,000 * 4.53%

= $2,265

Journal entry at the time of sale to Rodgers will be:

Particulars	Debit amount	Credit amount
Cash	$50,000
Revenue		$47,735
Contract liability		$2,265

Ans. 4. Since the 100 needles shipped on August 1 are purchased using 10,000 loyalty points, the journal entry recorded will on same date will be to reduce the contract liability account balance and transfer it to revenue account (to recognize revenue).

Total amount allocated to contract liability = $2,265

Redemption of points = $2,265 * 10,000 points / 47,500 points

= $476.84

Journal entry will be as follows:

Particulars	Debit amount	Credit amount
Contract liability	$476.84
Revenue		$476.84