ADMS 3595 Lecture Notes - Lecture 9: Loyalty Program, Spot Contract
Chapter 13 – Supplementary Question 2
Question 1 - Customer Loyalty Program (Own Award)
Customers enrolled in the ABC Grocery Store Corp. (ABC) rewards program are awarded one point for
each dollar spent on qualifying purchases at the store. The points, which expire after seven years, may
be exchanged for a variety of goods, including a home entertainment system. Use the following
information to answer the required questions:
• In 2017, ABC’s enjoyed sales of $10,000,000 and awarded 8,500,000 points. Cost of goods sold
was $7,000,000
• Historically, 70% of points are redeemed before expiry. Based on this and the relative stand-
alone sales price of the performance obligations, $9,881,000 of the transaction price was
allocated to sales revenue with the remaining $119,000 ($10,000,000 – $9,881,000) assigned to
the reward plan obligation, representing the fair value of the reward points.
• In 2017, ABC purchased 100 entertainment systems at a total cost of $70,000 ($700 each). The
retail sales price of the entertainment systems is $1,000 each.
• Customers are required to exchange 50,000 points for an entertainment system. In 2017,
500,000 points were redeemed (10 entertainment systems).
Required:
a. Prepare a summary journal entry to record the sale of the goods and the recognition of the
provision for the loyalty program in 2017.
b. Prepare a journal entry to record the purchase of the entertainment systems in 2017.
Question 2 – Customer Loyalty Program (3
rd
Party)
Cheap Gas Inc. (CGI) provides registered customers with one Travel Point for each dollar spent on gas.
CGI purchases the Travel Points from a third-party provider for $0.01 per point. In January 2017, CGI
sold $1,400,000 of fuel for cash and awarded 1,100,000 Travel Points to its registered customers. The
cost of the fuel sold was $1,200,000. On February 15, 2017, CGI paid for the Travel Points awarded in
January.
Required:
a. Prepare a summary journal entry to record the sale of the gas and the recognition of the
provision for the loyalty program.
b. Prepare a journal entry to record the payment for the Travel Points.
Question 3 – Onerous Contracts
Contract A is for the future purchase of 1,000 tonnes of zinc, which the company had planned to use in
producing bronze. The company sold its bronze manufacturing business subsequent to entering into the
purchasing contract and does not have an alternative use for the zinc. The contract price is $350 per
tonne. At December 31, 2017, the year end of the company, the spot price was $280 per tonne. Under
the terms of the contract, a cancellation fee of $100,000 is payable if delivery is not taken.
Required:
Identify whether this contract is onerous. Assume that the effect of the time value of money is
immaterial. Prepare any necessary journal entries.
Document Summary
Question 1 - customer loyalty program (own award) Customers enrolled in the abc grocery store corp. (abc) rewards program are awarded one point for each dollar spent on qualifying purchases at the store. The points, which expire after seven years, may be exchanged for a variety of goods, including a home entertainment system. Use the following information to answer the required questions: In 2017, abc"s enjoyed sales of ,000,000 and awarded 8,500,000 points. Cost of goods sold was ,000,000: historically, 70% of points are redeemed before expiry. In 2017, abc purchased 100 entertainment systems at a total cost of ,000 ( each). The retail sales price of the entertainment systems is ,000 each: customers are required to exchange 50,000 points for an entertainment system. Question 2 customer loyalty program (3rd party) Cheap gas inc. (cgi) provides registered customers with one travel point for each dollar spent on gas.
