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 $220,500 of revenue and awards 175,000 loyalty points. The aggregate stand-alone selling price of the purchased products is $220,500. 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 $98,000 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 particular transaction/event, select "No journal entry required" in the first account field.)

Answer 1

SOLUTION

1. Journal entry to record July sales-

Date	Account titles and Explanation	Debit ($)	Credit ($)
7/31/18	Cash ($220,500*80%)	176,400
	Accounts Receivable ($220,500*20%)	44,100
	Revenue		22,050
	Deferred Revenue		198,450
	(To record July sales)

Loyalty Points: 175,000 * 0.20 * 70% = 24,500

Product Sales : $220,500

Allocattion-

Loyalty Points: 24,500 / (24,500 + 220,500) = 0.1 * 220,500 = $22,050

Product sales: 220,500 / (24,500 + 220,500) = 0.9 * 220,500 = $198,450

2. Journal entry to record August sales-

Date	Account titles and Explanation	Debit ($)	Credit ($)
8/31/18	Cash (98,000*(1-0.2)*75%)	58,800
	Accounts Receivable (98,000*(1-0.2)*25%)	19,600
	Deferred Revenue	17,640
	Revenue		96,040
	(To record August Sales)

Deferred Revenue:

175,000 points issued * 70% expected to be redeemed = 122,500 points to be redeemed

98,000 points redeemed / 122,500 expected = 80% redeemed

$22,050 deferred revenue * 80% = $17,640 Revenue earned