Question

Supply Club, Inc., sells a variety of paper products, office supplies, and other products used by businesses and individual consumers. During July 2018 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 70% probability that any point issued will be redeemed for the discount. During July 2018, the company records $157,500 of revenue and awards 125,000 loyalty points. The aggregate stand-alone selling price of the purchased products is $157,500. Seventy 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 $70,000 of merchandise. Sixty-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 particular transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Date	Accounts	Debit	Credit
July 2018	Cash	$126,000		(157,500 x 0.8)
	Accounts Receivable	$31,500		(157,500 x 0.2)
	Revenue		$141,750
	Deferred Revenue		15,750
Working
	Loyalty Points: (0.20 * 0.70 * 125,000) = 17,500
	Product Sales: 157,500
	Allocation:
	Loyalty Points: 17,500 / (17,500 + 157,500) = 0.1 * 157,500 = 15,750
	Product Sales: 157,500 / (17,500 + 157,500) = 0.9 * 157,500 = 141,750
August 2018	Cash	$36,400		(70,000 * (1-0.2) *0.65)
	Accounts Receivable	$19,600		(70,000 * (1-0.2) *0.35)
	Deferred Revenue	$12,600
	Revenue		68,600
Working
	Deferred Revenue:
	125,000 points issued * 70% expected to be redeemed = 87,500 points to be redeemed
	70,000 points redeemed / 87,500 expected = 80% redeemed
	$15,750 deferred revenue * 80% = $12,600 Revenue earned