In: Accounting
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.
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