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 60% probability that any point issued will be redeemed for the discount. During July 2018, the company records $216,000 of revenue and awards 200,000 loyalty points. The aggregate stand-alone selling price of the purchased products is $216,000. Eighty percent of sales were cash sales, and the remainder were credit sales.
Required:
1. Prepare Supply Club’s journal entry to record July and August sales.
2. During August, customers redeem loyalty points on $96,000 of merchandise. Seventy-five percent of those sales were for cash, and the remainder were credit sales. Prepare Supply Club’s journal entry to record those 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

Answer:

July Sales and liaiblity for points program:

Cash                          172,800 debit

Account Receivables 43,200 debit

             Sales Revenues                  216,000 credit

sales discount            24,000 debit

     loyalty benefit liability                  24,000 credit

August sales

loyalty benefit liability       19,200 debit

cash                                   76,800 debit

accounts receivables       19,200 debit

          sales revenues                      96,000 credit

Explanation:

July Sales

216,000 sales revenues from which:

80% cash: 172,800

20% on account: 43,200

points issued

200,000 x 60% chance x 20 cent each = 24,000

We recognie the discount now, to match the discount with the sales which generated

August sales:

96,000 x 80% = 76,800

from which: 75% cash 57,600

and 25% account: 19,200

we decrease the liability we create in the previous entry by the 20% discounted:

96,000 - 76,800 = 19,200