Question

Westfort Coffee offers a Loyalty program for frequent buyers of their drinks. Any customer who uses their loyalty card will get a credit of $0.05 for every $1.00 they spend. In 2019, customers with loyalty cards spent $30,000. Westfort Coffee also knows that 5% of all loyalty card users do not use their points.

Based on the above information, how much should Westfort Coffee show as a liability? Show your calculations.

Answer 1

So we can see that anyone who uses the loyalty card gets a credit of $0.05 for every $1 they spend.

In 2019 , customers with loyalty card spent $30000.

So this means that the credit they get = 30000 * 0.05 = $1500. This is the credit amount that should actually be recorded as liability by westfort coffee.

But then we can also see that, out of all the customers 5% of these loyalty card customers do not use their card.

So we can reduce the liability to 95% of the earlier calculated, 1500* 95% = $1425.

Westfort coffee will have to show a liability of $1425 in regards to the promotion with their loyalty card.

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