Question

Refer-a-Friend Program

Runway Discount ("Runway" or the "Company") is a privately held online retailer that sells discounted high-end fashion. In an effort to increase its sales and customer base, Runway implemented a customer referral marketing campaign(the "Refer-a-Friend Program")whereby existing customers can refer friends to Runway and receive a $25 credit towards the purchase of future merchandise. The terms of the program are as follows:

Runway offers existing customers (the "Existing Customer") a $25 credit (the "$25 Referral Credit") if the Existing Customer refers a friend (the "New Customer") to Runway's Website and the New Customer purchases merchandise from Runway.

After a purchase is made by the New Customer, the Existing Customer receives a $25 credit to be applied to a future purchase from Runway.

The $25 Referral Credit represents the fair value of the cost Runway would pay to acquire a new customer from an unrelated third party or marketing firm who is not a purchaser of its products. The program is open to all of Runway's customers and does not need to be combined with any initial or existing purchases.

Required:

1. According to ASC 606, how should the $25 Referral Credit be recorded in Runway's Income Statement? As a reduction of revenue or as a marketing expense?

2. When would Runway record the $25 Referral Credit? What are the entries Runway would record when the $25 Referral Credit is earned by the Existing Customer? What are the entries Runway would record when the $25 Referral Credit is redeemed against a $100 purchase made by the Existing Customer?

Answer 1

Refer a below image for the above mentioned questions.

Answer: 0 According to Asc 606, credit be recorded in As a reduction of revenue how should the $25 Referral Runway's Income statement ? cor) as a marketing expense ? in * Referral Gift card of $25 would be recorded the debit side of the income Statement as a marketing expense. @ when would Ronway record & a5 Referral credit ? what are the entries Runway would record when the $25 Referral credit is earned by the existing costomer? What are the entries Ron way wuld record when the $25 Referral credit as redeemed against a $ 100 Porchase made by the existing costoner? & Runway would record $25 Deferral credit when the costomer make the purchase, as a discount. * the existing carns No entry when costoners referral credit. & * 20 Entry: cash All Dr $75 Discount Allowed Alc or $25 To sales Alca , $100 (Referral Credit &25, redeemed againsta $ 100 porchase)