Question

You have been hired to advise Jally Coffee Company on an accounting issue. The company has stores throughout the United States (many stores). To boost sales and customer loyalty, Jally has devised a program it plans to implement effective January 1, 2019.

Under the plan, customers will receive “Jally Points” for each purchase. The number of points will be based on the dollar amount of the purchase. Upon accumulating 100 Jally points, a customer will be able to claim a free coffee drink, with a value typically between $4 and $8. Jally believes that 90% of points awarded will ultimately be redeemed for the free coffee drink by customers.

Required: For simplicity, focus on a customer purchasing several drinks at one time, receiving 50 Jally Points. How should Jally account for those points at the time the 50 points are awarded to the customer? (As you think about this, your mind wanders back to Intermediate Accounting II when you studied current liabilities and contingencies.)

You should be able to answer this in three sentences or less, do not write a long answer, please!

Answer 1

The 50 points so awarded to the customer before having complete 100 points for the free coffee drink, Jally must account these 50 points (ie. half the value of free drink) to Program Liability and the journal entry for such transaction should be : Debit the Program Expenses and Credit the Program Liabilities (classify it as current liabilities). When the customer avails the “100 Jally points” (ie. value of the free drink) and have free coffee drink, then journal entry should be: Debit the Program Liabilities and Credit the Inventories.