Question

In: Accounting

Jet Fuel Ltd. has a customer rewards program. For every litre of gas Jet Fuel sells,...

Jet Fuel Ltd. has a customer rewards program. For every litre of gas Jet Fuel sells, the customer is awarded one point. Each point is worth $0.10 off the purchase of future goods.

During the month of January, Jet Fuel had gas sales of $172,000 and sold 144,000 litres of gas. Jet Fuel estimates 60% of the points will be redeemed. During February, the actual value of the points redeemed is $7,250.

Instructions

a) Prepare the journal entry for the January sales.

b) Prepare the journal entry for February reflecting the actual loyalty points redemption.

Solutions

Expert Solution

Answers:

a.

Journal entry to record the sales in the month of January

.

Cash A/c...............................................................................Dr $172,000

Sales A/c..................................................................................Cr $163,773

Unearned Revenue - Loyalty Program A/c..............Cr $8,227

.

Working Notes:

Stand-alone value of sold gas is $172,000

Stand-alone value of the loyalty points is $8,640

.

Computing Stand-alone value of the loyalty points as:

Stand-alone value of the loyalty points = Gas sold * Each point worth * estimate points redeemed

=$144,000 * $0.10 * 60%

= $8,640

.

Total value = Stand-alone value of the loyalty points + Stand-alone value of the gas sold

= $172,000 + $8,640

= $180,640

.

Computing Allocation of gas sales as:

= (Stand-alone value of the sold gas / Total value) * Stand-alone value of the sold gas

= $172,000 / $180,640) * $172,000

= $163,773

.

Computing allocation of loyalty program as:

= (Stand-alone value of the loyalty points / Total value) Stand-alone value of the sold gas

= ($8,640/$180,640)* $172,000

= $8,227

.

b.

Journal entry reflecting the redemption of actual loyalty points for February as:

Unearned Revenue-Loyalty Program A/c...............................Dr  $7,250

                Revenue-Loyalty Program A/c...........................................Cr $72,50  


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