Question

Supply Club, Inc., sells a variety of paper products, office supplies, and other products used by businesses and individual consumers. During July 2021 it started a loyalty program through which qualifying customers can accumulate points and redeem those points for discounts on future purchases. Redemption of a loyalty point reduces the price of one dollar of future purchases by 20% (equal to 20 cents). Customers do not earn additional loyalty points for purchases on which loyalty points are redeemed. Based on past experience, Supply Club estimates a 80% probability that any point issued will be redeemed for the discount. During July 2021, the company records $136,000 of revenue and awards 150,000 loyalty points. The aggregate stand-alone selling price of the purchased products is $136,000. Seventy-five percent of sales were cash sales, and the remainder were credit sales.

Required:
1. & 2. Prepare Supply Club’s journal entry to record July and August sales. During August, customers redeem loyalty points on $96,000 of merchandise. Seventy-five percent of those sales were for cash, and the remainder were credit sales. (Do not round intermediate calculations. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Note: Enter debits before credits.

	Transaction General Journal Debit Credit 1

Note: Enter debits before credits.

	Transaction General Journal Debit Credit 2

Answer 1

Answer-1. & 2:

Date	Account Title and Explanation	Debit $	Credit $
31.07.2021	Cash ($136,000*75%)	102,000
	Accounts Receivable ($136,000*25%)	34,000
	Revenue		115,600
	Deferred Revenue		20,400
	(To record sales)

Workings:

Loyalty points = 150,000*80%*20%

= 24,000

Product Sales = 136,000

Allocation:

Loyalty Points: 24,000/(24,000+136,000 = 15%*136,000

= $ 20,400

Product Sales: 136,000/(24,000+136,000) = 85%*136,000

= $ 115,600

Date	Account Title and Explanation	Debit $	Credit $
31.08.2021	Cash	57,600
	Accounts Receivable	19,200
	Deferred Revenue	16,320
	Revenue		93,120
	(To record sales)

Working:

150,000 points issued * 80% expected to be redeemed = 120,000 points to be redeemed

96,000 points redeemed / 120,000 expected = 80% redeemed

$20,400 deferred revenue * 80% = $ 16,320 Revenue earned

(96,000 * (1-0.2) * 0.75) = 57,600

(96,000 * (1-0.2) * 0.25) = 19,200

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