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 55% probability that any point issued will be redeemed for the discount. During July 2021, the company records $187,000 of revenue and awards 300,000 loyalty points. The aggregate stand-alone selling price of the purchased products is $187,000. 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 $132,000 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.)

Journal entry worksheet

• Record the July sales.

Note: Enter debits before credits.

	Transaction General Journal Debit Credit 1

Answer 1

Supply Club, Inc. Journal Enteries Date Particulars 31.7.2021 Cash a/c Dr. Accounts Receivable a/c Dr. To Revenue To Deferred Revenue Debit in $ Credit in $ 140250 46750 158950 28050 Loyalty Points: (0.20 * 0.55 * 300,000) = 33,000 Product Sales: 187,000 Allocation: Loyalty Points: 33,000/ (33,000 + 187,000) = 0.15 * 187,000 = 28,050 Product Sales: 187,000/ (33,000 + 187,000) = 0.85 * 187,000 = 158,950 Dr. 31.8.2021 Cash a/c Accounts Receivable a/c Dr. Deferred Revenue a/c Dr. To Revenue 79200 26400 22440 128040 Deferred Revenue: 300,000 points issued * 55% expected to be redeemed = 165,000 points to be redeemed 132,000 points redeemed / 165,000 expected = 80% redeemed $28,050 deferred revenue * 80% = $22,440 Revenue earned (132,000 * (1-0.2) *0.75) = 79200 (132,000 * (1-0.2) *0.25) = 26400